Tips for working with your lender
One of my first jobs out of college was as an agricultural loan officer in Northwest Wisconsin. I really enjoyed working with producers to help them achieve their business and personal goals! This job was my training ground to understanding the inner-workings of a business. Sure, I had learned about business in lectures and textbooks, but it was as a lender that I really learned how a business works. I also saw how successful farms worked with their lenders and I'd like to share a few of those observations with you.
Tell your lender about large purchases
I can think of a few occasions when I was visiting with a customer about financing a new piece of equipment or renewing a line of credit. Everything would look really good and I would leave the farm thinking “great, this will be easy to get done.” And then… they would call to tell me that they had forgotten about a few pieces of equipment or land that they had purchased the previous year. Yikes. It would completely change the picture on their debt load and cash flow. The “easy” deal was no longer easy and the rosy financial picture was not so rosy.
It is important to let your lender know about purchases as they happen. They can update your balance sheet and counsel you on its impact to your cash flow. That is not to say you must finance every purchase with your main lender, but it is important to let them know what is going on. By doing that, they can let you know if they foresee any problems in the future and avoid surprises.
Pay down your line of credit
Every year, you should try to pay down your line of credit. The line of credit is intended to finance the materials you need for planting (and other daily expenses) and should be paid down as you receive income for those expenses (sales of crop or milk). Think of it like a credit card. Sometimes you may need to use it, but you want to pay it down quickly.
If you never pay it down, you will need to keep asking for increases. At a certain point, your line of credit may become unmanageable. My advice - Keep on top of it! Pay it down as you are able. If you sell crops, pay down the line of credit then spend money on other items.
Do not purchase capital assets (tractors, equipment, etc.) with your line of credit
It is so easy to see a piece of equipment at an auction, buy it, and then use your line of credit to finance it. Your line of credit is available and easily accessible, you save a trip to the bank, so it seems like a win/win. Don’t do it! Your line of credit is for short-term expenses like I mentioned in the previous point. Just like you would not put a car on your credit card, you don’t want to put a tractor on your line of credit. Put it on a term note so that you still have money available in your line of credit for the short-term expenses. A term note will also ensure that the tractor gets paid for over its depreciable life.
Do not sell the collateral on your loan without paying down your loan
Know what items are collateral. If you sell them, pay down the loan. This may seem like common sense, but once or twice a farm would tell me that they had sold a tractor and I would see that there was a loan on that tractor. The proceeds from the sale of the tractor had been spent, so we had to restructure debt to ensure the loan was properly collateralized. It was stressful for everyone. If you sell something and you have a loan against it, be sure to use the proceeds to pay down the loan. If you are selling the item because you need cash, talk to your lender - there may be other solutions.
Talk to your lender if you are experiencing financial distress
Finally, be proactive. If you are having problems or can see that things are not cash flowing, talk to your lender. Nobody likes surprises. Your lender wants to help you be successful. By staying ahead of problems, you can create a plan to prevent little problems from becoming big problems.
August 13, 2016