meta Mistakes that hurt a farm’s credit :: The Bullvine - The Dairy Information You Want To Know When You Need It

Mistakes that hurt a farm’s credit


Farmers and bankers are in the risk business together, and ag producers are on the front lines of risk management every day. In nearly 100 years of lending to Northwest agriculture, we’ve learned that when cash is plentiful and profits are high, it’s easy to make decisions that have long-term negative implications. Successful managers make balanced decisions in both good and bad times, considering the financial, management and personal implications. Avoid the common mistakes that are easy to make when times are good.

Common Mistakes

Northwest Farm Credit Services’ Relationship Manager, Allan Bafus, shares insights and advice about mistakes that can hurt your farm’s credit.

New Paint:  Strong profits are great, no question. In the current cycle, many producers have generated sufficient income to afford equipment upgrades that enhance efficiency and take advantage of new technologies. While new equipment has many benefits, it is also requires the use of cash reserves for down payments and higher ongoing loan payments.

Expert Advice:  Making smart equipment purchases is easy. Build a projection of associated costs and savings, including debt payments and the impact of down payments on your cash position. Assess the markets and determine if your planned purchase makes sense in a down cycle.

Killer Toys:  Fancy cars, boats and vacation homes are all examples of killer toys that don’t generate a financial return. When cash is plentiful, these discretionary purchases may seem minor, but without a disciplined approach to off-farm acquisitions, many unwary producers find themselves short-selling toys at a discount to generate cash for operations. It’s easy to increase one’s standard of living, but very difficult to dial it back once it is set.

Expert Advice:  Each year, pre-define how you will allocate profits. The allocation should depend on anticipated profitability, your strategy, and the business cycle. During periods of business growth or lower profitability, you may allocate a higher portion of profits to business reinvestment (and vice-versa). This provides increased predictability for you and your business, while generating discussion on priorities for allocation of limited resources.

Growth for Growth’s Sake:  Business growth is one measure of success, but it’s easy to get caught up in the momentum and excitement without considering ongoing management and cash requirements of an expanding operation. For farmers, hard work is no stranger, but even the most capable and tireless managers can spread themselves too thin, causing dropped balls and less-than-ideal results. Growth also has ongoing costs beyond initial purchase prices or loan payments, including increased labor and input costs.

Expert Advice:  Grow smart. When developing projections for land purchases, new leases or other growth opportunities, assess the impact on you and your management team. Also calculate the impact to your ongoing working capital position to ensure you still have sufficient operating funds to manage through the cycles. Also remember the first year operating on new ground rarely yields maximum results.

Success Without a Plan:  It’s common to hear senior-generation producers say, “If my daughter or son wants to come back to the farm, by gosh, I’m going to give them a chance!” While it is noble to continue the farming legacy in the next generation, without a clearly defined plan and on-ramp, the dream of a happy family farming together can turn into damaged relationships.

Expert Advice:  Clearly define a shared vision for the future and assess individual passions, skills and long-term goals to ensure a good ‘fit’ for working together. Then determine what the business needs and what it can afford. Family members who work in the operation for the wrong reason often find themselves frustrated and unfulfilled.

Your Farm’s Credit

Lenders are in the risk business, and every management decision you make affects your operation’s risk profile and potentially your bottom line. The following are examples of how a higher risk profile affects your borrowing:

Increased Interest Rates:  Lenders provide capital to borrowers at a rate that reflects the risk in each operation. Just like the expected return on a stock portfolio, when risk is higher, the expected return (or interest rate) increases.

Less Flexibility:  Lenders use various tools to mitigate the risk of each loan. For operations that make the common mistakes outlined above, managers and owners can commonly expect the following:

  • More reporting – Additional information requirements or increased frequency of reports.
  • Loan covenants – Financial targets to ensure the operation remains healthy.
  • Budgeted lines – An operating line budgeted on a monthly basis.
  • Shorter loan durations – Annually renewed operating loans.
  • Third-party guarantees – Enhancements that come with a financial cost.
  • Other – Depending on the situation, lenders may use many tools to mitigate risk.

Access to Capital:  Sometimes the answer is no. If the risk in your business becomes too high, your lender may not be able to finance your operation. While this might be a difficult discussion, if your lender is putting on the breaks, it is likely that the risk profile of your business has increased considerably.

Making Smart Decisions

While it’s easy to make mistakes in good times, it is also easy to be overly cautious and miss the benefits of hard work and business ownership. Smart managers make balanced decisions, taking into account the personal and financial risks and rewards of each opportunity. Be aware of the common mistakes farmers make in good times and seek input from your trusted advisors to identify blind spots. Talk to your lender about the credit implications of major decisions and you’ll know where you stand. Farmers are in the risk business too, and smart, calculated risks are what make the most successful businesses, families and farms.

Source: Northwest Farm Credit Services


Send this to a friend