The relationship farmers or ranchers have with their bank is one of the most important ones for their business, and can provide a stepping stone to success.
When it’s time to decide which bank to take your business to, it helps to keep certain key points in mind. Have a good idea of the lending products the bank offers and if these work well with your needs, such as short-term working capital loans and long-term mortgage loans.
Ascertain if the bank will finance construction projects and equipment purchases.
“Make sure the bank has a product selection that works best for you,” said Allison Paap, an ag banker in Southern California. “Be sure you’re satisfied with the level of expertise they have, that they understand your operation and its historical cash flows, beyond the forms you submit.”
“It’s a long-term relationship, so make sure you’re comfortable with them and that they will work with you in the long term, not just for that particular transaction,” Paap said. “Ag is a cyclical business and the banker needs to understand it.”
For growers of highly seasonal products, she advises ensuring the loans are structured properly. Monthly payments may be hard for growers who get the bulk of their sales over a couple months a year, such as flower growers for example, so in such cases annual payments will work better.
But in the case of a dairy, which gets monthly payments from the creamery, making payments each month can work better.
When seeking construction loans or long-term loans, some lenders may not be able to finance it with only farm property as collateral, and will look for other assets, so these are questions to ask in initial meetings.
She emphasized the importance of maintaining good records that show a history of farm income, and if you have a day job or other business interests, then records of income streams from those avenues, too. It will help to work with an accountant to streamline these records before approaching a bank for a loan.
Lenders will also often ask for production reports, which will help determine projected income for a particular grove or block of acreage on the farm, so growers will need to piece together production figures on yield and prices for each. Loan appraisers will evaluate these reports to see if it’s viable to extend a loan.
“If they want a $3 million loan and the grove produces about $10,000, then the production report will help determine if they can repay the loan,” Paap said.
She cautioned against using short term working capital loans to buy long-term equipment, which can place farmers in tight situations, since equipment loans tend to be for periods of three, five or seven years, paid back over several seasons.
Leading indicators for 2019 show that interest rates will increase, so it’s important to have a clear understanding of your budget and what the cost of borrowing will be, Paap said.