Tips for Approaching a New Lender

Despite the difficulty experienced in financial markets in the last few years, agriculture has served as an economic bright spot. Not to say serious volatility hasn’t posed challenges, but the sector overall remains an attractive prospect for banks.

“It’s an interesting time for agriculture. Financial resources have to be managed relatively well and there are many opportunities out there,” says David Oppedahl, business economist with the Federal Reserve Bank of Chicago, noting that repayment rates are rising and banks have been seeing fewer renewals or extensions. “Overall, it’s a better financial climate than it was a year ago.”

Grain elevators are capitalizing on great margin opportunities by enhancing their ability to carry grain by investing in new storage facilities and improved receiving capacity; however, with this, the need to finance a larger inventory position and grain contracts requires a tremendous amount of capital.

Volatility has risen the demand for working capital lines of credit. The last few months, for example, commodity prices have jumped 30% to 40%. Extreme market volatility during a short period of time requires grain handlers to cover margin calls by quickly accessing funds to ensure their grain inventory and hedged positions are in compliance with various state and federal regulations.

Consequently, elevators require a bank with the capacity and size to meet its needs in a changing environment. The overall growth of agribusiness has skyrocketed the borrowing needs of middle-market country elevators — sometimes by as much 100%. As a result, many operations have outgrown their local commercial bank because it is unable to provide large lines of credit or, to avoid risk exposure, chooses not to.

“[Commercial banks] may not have the money or expertise to be a banker for a quickly growing operation,” explains Stephen Hatz, senior vice president/area manager with Bank of the West’s Central Plains Agribusiness Department. “There comes a point where [grain elevators] can very quickly outpace the financial ability of the bank and its management ability.”

Finding a new bank

If it is necessary to move your business to a new bank, borrowers should evaluate their potential lender based on its financial capacity to handle both their short-term and long-term needs.

Rabo AgriFinance’s Tim Mellencamp, vice president of middle market banking, stresses that grain handlers do business with a firm that specializes in commodity finance: “If the bank isn’t comfortable with financing hedges or doesn’t prefer wild price movements — things we deal with day to day in the commodity finance world — they won’t be doing their clients or themselves any favors.”

A bank’s reputation, consistency and knowledge of the industry goes a long way, but an elevator should make sure — especially in these volatile times — that they’re working with a solid bank that can meet their financial requirements.

“It’s a challenge at both ends,” says Mitch Ferree, Regions Bank’s South Indiana City president. “Both must have a good understanding of what’s taking place in the market to adjust to changes fluidly; i.e., the lender needs to move quickly and adapt to the elevator’s needs without disrupting its flow of operation, and the borrower must be able to anticipate the need for the credit to be able to get things done in a timely manner.”

Lenders may have available funds, but they are trying to better hedge themselves against ever-changing commodity market conditions. After you’ve done your research and before you consider approaching a new lender, there are a few things you can do to better your company’s position with a bank.

Getting your financial house in order

Here is a brief checklist of the things your company should have prepared if it doesn’t have an existing relationship with a lender:

Assess your financial position

Take a step back and take an objective look at your business and its needs. For example, how much outstanding debt does your company have?