Market News & Headlines >> Brock Consultant Katie Hancock's Blog: Lending About Relationships, Not Just Spreadsheets

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Insights from Brock Associates Consultant Katie Hancock

Three years ago, the struggle for more land created a frenzy of farmers parading around like used car salesmen. Today, the potential struggle is more likely cash flow. You need continuous cash for inputs, payroll, rent, machinery, etc. Operating cash isn’t just a concern during tough economic times. What would you do if your lender didn’t complete a timely loan renewal? I want to share my perspective to help others protect themselves.

First, I’m referring to operating loans. These are short-term in the range of one to two years. On the other hand, a real estate loan may be fixed for 30 years. A short-term loan requires a renewal process—typically each year. A small percentage of operations are internally financed, but the majority need at least some level of operating cash. 

I hear Dr. Dave Kohl speak at least once a year. He has suggested lenders can quickly strain a farm business. If your operating capital is cut off (for whatever reason) you’re in trouble. The risk is higher during economic downfalls, but can happen anytime and to anyone. Obviously, a borrower in financial trouble may struggle to renew a loan, but that’s not the only scenario.

How does this happen? Because lender turnover has become constant. Why? Primarily, I blame competitive lending. There’s excess money to lend. That doesn’t mean money is freely handed out, but it is readily available. In my opinion, lending institutions aggressively seek lenders that can find and service ideal borrowers. Demand creates opportunity for better pay, which results in lender turnover—no matter how many years he or she has worked at a particular bank. While competitive lending offers an opportunity to the borrower as well, it can create uncertainty due to employment turnover.

Bank consolidation is even more frequent, but is hardly an inconvenience. The consideration and planning behind it seems nearly unnoticeable to borrowers because there was time for sufficient planning.  Lender turnover, on the other hand, is sudden and much more disruptive to both borrowers and the institution. 

If lenders are moving around rapidly, what does that mean to the borrower? That means you can quickly find yourself with a new lender. It sounds simple to follow the lender to a new location, but it is not. Anyone that has secured a farm operating loan knows it’s not a quick process to simply change institutions—especially if you’re caught in the middle of loan renewal time.

I know this situation very well because it happened to me this year. My lender left the bank before my loan was renewed. It’s not sudden for the lender in such a situation, but it can’t be discussed ahead of time. When someone considers a new job, they don’t go around advertising it! There are also common guidelines in the workplace in which someone can’t leave a place of business and contact previous clients—adding to the confusion.

How did I adjust? The saving grace was having other lender relationships in which I was able to quickly change lenders. I also had detailed financials and spreadsheets detailing things like rental arrangements, crop rotation, marketing sales, and yield history. Had my new lender been a stranger to us and the business, a drawn-out delay would have been very embarrassing and detrimental.

Relationships are very important among lenders and borrowers. I’ve learned lending involves not only the numbers on paper, but also the character of the borrower. I’ve never heard a lender admit this, but it’s simply good business to work with trustworthy people. Character can be especially important for someone with less capital than average.

It’s not recommended to borrow from too many different lenders, but it can be helpful to have a few that are familiar with you and your business. I’ve heard more than three lenders is red flag, but that also suggests it’s not uncommon to have more than one. I plan to stick with the one I have, but I always want to have a plan ‘B’ in mind.

A plan B may simply mean developing a relationship with other lenders in the same institution. Ideally, one would always keep an eye out at multiple locations. Community involvement is one way. Another would be attending business meetings outside the realm of agriculture. 

Your lender wants you to be successful, but never lose sight of a plan B if he or she can no longer provide the service. Keep your cash flow secure by developing relationships and/or working with other lenders. Detailed financials will support your business, but personal relationships will be the key to avoiding disruptions. 

Email Katie at [email protected]