Adding to these concerns, producers can be unsure how to begin a productive, successful dialogue with their banker to discuss these challenges and “get approved” for the financing they need. Fortunately, this communication disconnect can be resolved if farmers and their bankers talk early, often and openly.
Come with the right numbers
While producers are sophisticated business operators, it’s not uncommon for a less experienced owner – or someone who hasn’t approached a lender before – to expect a speedy credit approval if they simply hand their banker a stack of financial statements that include everything but the kitchen sink.
The reality is: Instead of a ream of paperwork, a banker is usually looking for specific information to assess a client’s capacity to take on new debt. Most often, a banker wants the following information to identify a credit solution that matches their client’s goals and circumstances:
Strength of management: Be prepared to show your ability to run the business successfully by discussing your tenure, background in dairy, including your hands-on experience and achievements, training or education and involvement in the agricultural community.
Strength of cash flow: Provide data to show your operation’s cash flow history and ability to handle potential debt payments. Generally, a banker wants to see a three-year history of financial statements including key figures such as a debt service calculation and a debt-to-equity calculation. Note: Debt service coverage ratio is calculated by dividing EBITDA (net income before interest, tax, depreciation, amortization) by interest payments and yearly principal payments.
- Your collateral: Provide recent documents that assess the value of all assets that will serve as your collateral, including land, buildings, major equipment and other assets.
Keep in mind: Different financial institutions have varying criteria that guide their lending decisions, so ask your banker, before your meeting, what specific information they would like to see. And don’t be intimidated by these numbers. Since not everyone is comfortable with financial documents, ask your accountant to sit down with you when they prepare your financial statements to explain the highlights, so you’ll be familiar with the numbers when you meet with your banker.
Come with a plan
Since lenders like to have a good understanding of why the applicant wants a loan, come with a clear plan that explains the purpose of the loan and how it will aid your operation and profitability. Be ready to provide projections of the impact of the loan and any assumptions you are making. For example, “This robotic milking equipment will enable us to be more efficient by potentially reducing the need for full-time labor. Assuming prices remain steady at $Y per pound, we will net $Z thousand per month in added income.”
Don’t worry if you are not an expert in preparing business projections, since a good agricultural banker with experience in the dairy sector will gladly help you develop these calculations. It’s also a valuable way to strengthen your relationship with this individual and earn their “buy-in” to your plan.
Talk early, often and openly
Although dairy producers may face unexpected, last-minute financial needs, it’s a good idea to talk regularly with your banker about your business, including your current and future requirements. Since farmers are busy during their peak seasons, the annual review meeting with your banker in the offseason is a great time to openly raise your short- and longer-term goals. Discuss your immediate credit needs, like equipment upgrades, as well as anticipated requirements over the next 12 to 18 months, such as a barn build. This will enable your banker to diarize such needs for the year ahead and advise you on ways to fine-tune your financial condition now for a smooth credit approval when the time arrives.
You should also share any “blue sky” ideas with your banker. For example, if you’ve had your eye on your neighbor’s property, share this vision with your banker so they can potentially provide credit pre-approval, so you’ll be ready to bid with confidence if that land goes on the market.
And definitely disclose any business difficulties with your banker before they become a significant problem. Since good agricultural bankers are accustomed to the ups and downs of the sector, they can help you work through any financial crunches if you talk to them early and avoid surprising them with dramatic shifts in your financial picture.
This talk early, often and openly approach is particularly helpful when a family farm faces a leadership transition from one generation to the next. It’s essential to begin talking well in advance, both among family members and with the right financial, accounting and legal advisers who can guide the family through the process, including will and financial plan development.
Some farm owners wisely involve their children in the farm’s financial affairs – and introduce their advisers to their future successors – well before any transition to build their leadership confidence and capability.
Since it’s not uncommon for different generations to have conflicting views about the farm’s future, it can be helpful to have an impartial mediator to facilitate the discussions and navigate any emotional topics. The old adage, “Fair is not equal, and equal is not fair” alludes to the intricacies of drafting a solid succession and estate plan, so it is important to involve qualified advisers early to work through these details. A good ag banker will connect their clients with the right advisers to help write their wills and estate plans, and help ensure harmonious family relations during the succession planning steps.
Working with the right partner
Since good communication often depends on having the right partner, it’s helpful to reflect on the quality of your relationship with your bank and evaluate the promises and performance of your prospective or current banker. For example, does your relationship manager have the right experience and expertise in your business? Do they express interest in your operation and goals? And how committed is the bank itself, including the level of agriculture sector specialization within its credit approval and administration groups who will approve and support your financial needs? And does your bank offer flexible financial products and solutions that can accommodate your changing needs?
Finally, think about your relationship manager’s track record keeping in touch with you. Although busy farmers don’t want too frequent banker visits or calls, that individual should definitely customize their outreach based on your needs. And they should reach out to you whenever market or operating conditions change. For instance, imagine a banker who calls to say, “Hey, I’ve been hearing in the market and from some local connections that the price of feed is heading up; how are you managing and what can we do to help?”
That’s the kind of proactive and responsive communication a dairy producer deserves, with a banking partner who is ready to talk early, often and openly about the future of your operation.
ILLUSTRATION: Illustration by Kristen Phillips.
The authors are members of the Scotiabank Agricultural Banking team in southwest Ontario. Timothy Shuh (client relationship manager, Elmira, Ontario) can be reached by email or (519) 492-0281. Travis Riddell (agricultural team lead, southwest Ontario, Atwood, Ontario) can be reached by email or (519) 492-0394. Jeroen Slits (client relationship manager, Perth County, Ontario) can be reached by email or (519) 492-0438.
For more information, visit Scotiabank.
This article is provided for information purposes only. Readers should consult their own professional adviser for specific financial, investment and/or tax advice tailored to their needs. Information contained in this article, including information relating to interest rates, market conditions, tax rules and other investment factors, are subject to change without notice, and The Bank of Nova Scotia is not responsible to update this information.