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Q: Describe the importance of having a complete/detailed balance sheet when meeting with lenders?

CRAIG POLLOCK, Branch Manager of Farm Credit East, Sangerfield, New York
A: A complete and detailed balance sheet allows an assessment of the capital position of the business and an understanding of the components of the customer’s net worth. Is net worth heavy on fixed assets? Is liquidity good? Is debt structured properly? Also, a complete and accurate balance sheet allows benchmarking for comparison to peers in the industry. Finally, bringing a balance sheet to the meeting allows more time for quality discussion of the farm business between the lender and the customer.

JENNIFER L. BERKIS-KEMMERER, President, Business Lease Consultants, Inc., Sinking Spring, Pennsylvania
A: We offer financing and leasing for equipment, vehicles and structures. Our process is very simple. Depending on the amount requested, a balance sheet may not be required at all. When we do ask for one, we are usually able to work with a very brief version and total assets and liabilities.

KATHY A. DAILY, Senior Vice President, First Financial Bank, Louisville, Kentucky
A: The balance sheet along with your tax returns give your lender a complete picture of your financial situation. Most producers are on a calendar-year basis, and the majority report their income on a cash basis. Lenders look at your taxes to determine what your gross from income is for the preceding year. Here are a couple of examples of why this is important:

  • You decide to wait to sell your grain until the first week of January to manage your taxes. The grain should be listed in your current assets as inventory/crops on hand. By doing this, your lender will be able to see what your actual earnings for
    the year were.
  • You have delivered grain but haven’t received your check yet.
    A detailed balance sheet will list the receivable for grain that
    was sold.
  • You prepay fuel because you can get a better rate by buying
    in bulk. Your fuel expense seems high versus historical years
    when only looking at the tax returns.

As an agricultural lender, I see balance sheets all the time that are six months old or provide no detail. The first thing that I am going to ask you to do is update your balance sheet. Six or three months into the year, you may not remember that you paid a debt off or bought a new sprayer. Maybe you have a balloon payment that needs to be refinanced, or perhaps you have a loan on a short amortization.

Q: What factors do you consider before making credit decisions with borrowers?

POLLOCK
A: An assessment of the borrower’s balance sheet, historical earnings and management abilities are factors initially considered. From there, we want to determine if the borrower knows their cost of production. Do they have a budget that is monitored and can they describe how they effectively manage the people working in their business?

BERKIS-KEMMERER
A: We look at the complete picture. The number of years the business has been established, the cash flow and previous credit history are just a few basic factors. We work with our customers to secure the right financing for their equipment needs.

DAILY
A: There are several things such as character of applicant, ability to repay the debt, credit history, management ability, and type and condition of collateral. I personally like to meet with the producer at their farm to understand their operation and get to know them. Financial statements, tax returns and cash flow statements don’t tell the whole story. A tax return can’t tell your lender that the reason you didn’t get your beans sold last year was because the new grain dryer didn’t get installed in time and you lost the majority of the crop.

Q: How can lenders work more constructively with borrowers who are having problems?

POLLOCK
A: First and foremost, each party needs to keep the lines of communication open… talking things through usually results in a solution. Along those lines, the borrower needs to identify how they will adapt and work through the issues to resolve the problems. The options developed are usually stronger when both the lender and the borrower provide input. From there, lenders need to be open to rescheduling payments or recasting debt, if feasible. Finally, we have found that borrowers who arrange for a consultative resource and/or outside experts to work with on an ongoing basis (not just during tough times) is a powerful tool that positions the business to improve operating performance and become better positioned to weather downturns. Successful producers recognize that volatility and increased complexities, both within and outside the business, dictate that they seek out new ideas and potential solutions beyond their farm gate.

DAILY
A: The lender doesn’t need to know about assets and debts that aren’t farm related. Lenders need to know about ALL of your assets and debts so that we can help you structure your finances for success.

Q: Are farmers more price conscious given the fluctuations in the commodities market (dairy, grain, etc.)?

POLLOCK
A: Farmers exercise greater cost control and think longer about capital spending when commodity prices decline. Farmers who adapt to commodity price declines work closely with their lender and proactively cut costs or sell non-essential assets.

Managing the cycles requires current and accurate financial records to make real-time adjustments. Collaboration with similar businesses to share resources or seeking cooperative buying opportunities with fellow producers to gain economies of scale are other measures that can be employed.

Finally, price and cost risk management tools have a place in dairy and grain enterprises; such tools are used to manage the highs and the lows and ensure a consistent profit over time.

BERKIS-KEMMERER
A: We have seen a bit of a slowdown in the purchasing of new equipment due to recent market conditions; however, our ability to customize payments to match a client’s cash flow certainly helps with market fluctuations.

DAILY
A: We are absolutely seeing farmers being more price conscious. Producers don’t know how long current prices are going to last and they are making plans for an extended downturn. We have seen very few purchasers and a lot more refinances in recent months.

Q: What are the trends (unusual or not) that you’re noticing?

POLLOCK
A: Regulations, for example environmental and identifying the origins of food products, continue to prevail rather than wane; there’s adoption of technology along with organizing data for maximum returns to the business; and the new generation of farm management is bringing new ideas as they take control of the farm business. Down the road, we are going to see scientific advances that amaze us with respect to improved yields and increased food safety. Finally, water is rapidly gaining importance as a critical resource; it will be interesting to see if the availability of water shifts where food is produced.

BERKIS-KEMMERER
A: Over the past seven or eight years we have seen an increase in our equipment lease and finance applications. Banks have going through a cycle of tightening down on credit. We are able to approve clients with just a simple application, sometimes up to $250,000. Businesses are holding on to their available bank lines for working capital needs, and utilizing our programs for their purchases.

DAILY
A: We are seeing a lot of credit card debt, some of which is for personal use, but others are related to the farm operation. It is important to keep these to a minimum and to always keep farm and personal separate.