Tips for Approaching a New Lender
If you're looking to cover margin calls or expand your operation, make sure you have your financial house in order before approaching a bank.
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 with lots of opportunities out there andthe financial resources have to be managed relatively well,” says David Oppedahl, economic researcher with Federal Reserve Bank of Chicago, noting that repayment rates are rising, and they have been seeing fewer renewals or extensions. “It’s a better financial climate than it was a year ago.”
Lenders have the funds available, but they are trying to better hedge themselves against ever-changing commodity swings and trends. This has lead to increased caution when evaluating if borrowers are in a good cash flow situation to justify the loans.
Over the course of the last 18 months, both grain elevators and feed mills have sought out financing for capital acquisitions and equipment investments, grain handler have increasingly sought out working capital lines of credit to fund margin calls and grain purchases. When there’s a lot of volatility in the market during a short period of time, margin calls increase the demand for credit because grain handlers must have access to funds quickly to make sure their grain inventory and hedges position is in compliance with various state and federal regulations.
“As commodity prices swing, elevators require a bank with the capacity and size to meet its needs in a changing environment,” says Mitch Ferree, Regions Bank’s South Indiana City president. As an example he point to the last few months as commodity prices have jumped 30 to 40%. The result: grain elevators requesting more credit in short window.
Increased crop volumes, market volatility and the overall growth of agribusiness have catapulted middle-market country elevators into a position where their borrowing needs have skyrocketed. Many find they have grown their local commercial bank because it is unable to provide large lines of credit or, for risk exposure, it chooses not to.
“[Commercial banks] may not have the money or expertise to be a banker for the growing operation,” explains Stephen Hatz, Bank of the West’s agribusiness area manager based in Omaha. “The owner of a reasonable operation needs to make the decision to move on. There comes a point where [grain elevators] can very quickly outpace the financial ability of the bank and outgrow its management ability.”
If it is necessary to move you business to a new bank, borrowers need to evaluate their potential lender and its financial capacity to handle both their company’s long-term and short-term needs. 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 deliver and meet their additional needs going forward.
“It’s a challenge at both ends,” Ferree says. “Both must have a good understanding of what’s taking place in the market to be able to adjust to changes in a fluidly, i.e. the lender needs to move quickly and adjust to their needs without disrupting the elevator’s flow of operation, and the borrower must be able anticipate the need for the credit to be able to get things done in a timely manner.”
After you’ve done your research and before you consider approaching a new lender, there are few things you can to better your position with a bank.
Get your financial house in order
Here is a brief checklist of the things your company should have prepared if you don’t have an existing relationship with a lender:
• Assess of 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? Do not borrower every dollar made available to your company.
Amy Gales, executive vice president of CoBank’s regional agribusiness banking group, explains: “The last thing a borrower wants to do in this new world of volatility is borrow more than it can handle. You still need some cushion for the unexpected. If you run into a period of continued volatility, your operating loans will need to be increased and the cushion can be eaten in a short amount of time.”
• Proper paperwork is pivotal
Potential borrowers should have a firm financial package prepared before approaching a bank. The key items include:
- Audited financial statement
- Three years of previous year-end audited statements
- A borrowing base, as well as borrowing bases to match up to previous year-end statements
- Historical profit-loss statements
According to Hatz, there are two kinds of quality paperwork: the technical quality, i.e. the level to which their year-end financial statements are prepared by third-party audit/accounting firm; and then the information you get on an interim basis, presented in the same format as year-end, but in a concise format and delivered in a timely manner.
• Have a plan and be able to back it up
Before approaching a bank, make sure you have thoroughly evaluated how you’re going to repay the loan. Prepare a feasibility study to prove to the lender that you have taken a long-term look at your business and have a firm idea of where it is headed. The feasibility study will show what the balance sheet look like before and after the expansion; demonstrate how you will handle volatility; and highlight how you have planned for the unexpected.
“Remember, when you’re looking for a loan to add to storage or handling capacity, you’re not just borrowing money for fixed assets or capital needs, you’re also borrowing money for the line of credit,” notes Gales.” You need enough working capital to support a higher line of credit. There are two parts to that loan request: The capital expenditures and the working capital portion.”
Borrowers should also plan in terms of how they mitigate the risks associated with their position.
“I prefer have an idea of how borrowers actually hedge and what kind of margins they keep in place,” Ferree says.
Oppedahl adds, “Borrowers need to be mindful they have cash flow to support loans and operations. Anything they can do to shore up cash flow and to demonstrate to the banks they’re in a sound financial position will help them get the loans they’re after.”
While liquidity, a secondary source of repayment and historic performance highly influence the rate a borrower will receive, there are other factors contributing to the lenders decision to borrow to your company: capable management.
“In this day and age with demand for credit that is out there, quality of management is vital providing to the needs of that customer," Hatz says. "It's a variable of opinion but you would want a high regard for management to handle controversial situation and changing ones.”
Gales agrees: “The No. 1 thing is management. If we have a lot of confidence that manager is able to pull the resources together — despite difficult circumstances — we’re going to be willing to stretch with them.”
The stability of management is a key point up have to take into account. As a customer, if you want to make changes or changes occur contact your banker so they can give you an idea of how that’s going to impact your loan.
“It may be as boring as if statistical communication or giving insight into future plans, but it ends up being an important item in accessing management,” Hatz says. “Numbers give you part of the picture but communication will better their positions.”
How to make a lender more familiar with management team?
• Succession plan: If it is a family operation, have a succession plan in order. Lenders want to know who they’ll be working with over the course of the loan.
• Site visits: To give the banker a sense of what the company is trying to accomplish and show off your pride of ownership, plan a facility tour. Lenders will also want to evaluate the faculty’s location.
• Meet and greet: Set up a casual meeting with key members of your management team
• Managements track record: Lenders want to know upper management has been in the business a long time. The longevity of management demonstrates they have seen different scenarios and market ups and downs.
“I think it’s important to view these transactions as a true partnership between the bank and the borrower,” Ferree says. “If it’s a one-sided relationship, neither group wins. With market volatility, you both have to understand there will be give and take on both sides.”