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 Knowledge for the CommonWealth

Establishing a Business Relationship with Your Lender

Farm Business Management Update, February 2000

By Alex White

A positive, open relationship between producer and lender is a key element in the success of a business. To set the groundwork for this relationship, think of your lender as your business partner. Your success directly impacts your lender. That is, if your business is successful, the lender earns profits; if your business fails, the lender loses money. (Keep in mind, lending institutions are in business to earn profits through successful loans, not through foreclosure. As a rule, banks lose money in foreclosure situations.) Your lender's actions directly impact your operation. A poorly structured loan may have a considerable negative impact on the cash flow of your business, whereas a properly-structured loan may greatly enhance the cash flow position and profitability of your operation.

The big question is what should you look for when choosing your lender? The simple answer is choose a lender who has the same qualities you would require of a new business partner -- someone with whom you can develop a good working relationship. Consider the following factors when selecting your lender.

An understanding of your industry and your business

Choose a lender who has experience in or up-to-date knowledge of your particular industry. For the lender to properly structure loan products, he/she must understand the nature of the industry. "Speaking the same language" provides a common ground on which to work. Also, the lender must understand your business, as well as your personal and business goals. Do not work with a lender who doesn't recognize your goals.

The capacity to meet your borrowing needs

Capacity means the ability to make a loan in the amount you request. Many banks have limits on the amount of money they can lend to individuals, businesses, or certain industries. These loan limits may restrict the growth of your business. Be sure to ask about the amount of the loan limits.

Competitive loan products and quality services

Look for institutions that offer competitive interest rates, flexible loan terms, and quality financial services. Avoid generic loans. A good loan officer should try to customize the loan package to fit your individual business, such as matching the repayment schedule to the timing of cash flows in your business. Look for a lender who will negotiate on interest rates, but be careful about basing your choice of a lender strictly on interest rates. Think about your other input suppliers: Do you deal with the supplier with the lowest prices or with the supplier who best fits your needs in terms of price, quality, timing, etc.? Don't be afraid to pay a little bit more for quality service!

Consider other financial services you might need, such as cash management tools, insurance products, investment products, or retirement planning. You might be able to obtain lower interest rates on your loans by using other services the bank offers.

Stable loan officer staff with proven "track records"

As with most businesses, stability in the work force is usually a good indicator of quality. It takes time to establish a strong relationship with your lender, which can be hard to do (and frustrating) if the bank has a rapid turnover of loan officers. Currently, approximately 15 percent annual turnover of loan officers occurs nationwide. A common practice in agriculture is that a borrower will remain loyal to a certain loan officer rather than the institution. Look for loan officers with a proven history of quality service in your industry. Don't be afraid to ask your prospective loan officer for a list of references.

Long-term presence in your industry

Because the banking and lending industry is consolidating, and management teams are actively seeking business making opportunities, look for an institution that has a history of serving your industry in good times as well as bad times. Avoid lenders who jump in and out of industries during booms and busts. A good lender supports your industry during prosperous and challenging times. After all, in many instances you have greater need of support from your lender during the challenging times.

Access to the decision maker

Find out who makes the decision to grant or deny your loan request. Is it your loan officer, a local loan committee, or someone or some group at the regional headquarters? You should have access to the person or group who has authority on the loan decision. This access allows you to more fully explain the circumstances surrounding your loan request. Besides, most producers would rather do business eyeball-to-eyeball with their lender than deal over the phone with some unknown at headquarters.

Treats you as more than a number

Look for loan officers who work to establish a relationship with you. Are they interested in knowing more about you, your family, and your business? Will they follow-up with you after granting the loan? Do they often ask how they can better serve you, or how they can improve their working relationship with you? Do they have a genuine interest in helping you succeed without trying to get involved in the management of your business? Many times the personal touch provided by a quality loan officer is worth a slightly higher interest rate.

Professional loan officer staff

Just as your business partner should treat you with respect, your loan officer and lending institution should treat you in a professional manner. Look for a lender who has a record of trust, confidentiality, and ethical practices. Choose a lender who takes pride in his/her professionalism.

Processes your request in a timely manner

In today's fast-paced society, you often have a limited window of opportunity in which to make business decisions. You need to know if you can get the loan in time to take advantage of an opportunity. The most frustrating thing that can happen is to have to wait, and wait, and wait to hear from your lender! Look for a lender who can process your loan request in a timely manner.

Responsibilities in fostering a quality relationship

As with any relationship, it takes effort from both parties to make the relationship work. As a borrower, consider the following items.

Provide your lender with accurate, current financial statements

Quality information is vital to making sound decisions. Be prepared to provide your lender with pertinent financial information about yourself and your business. You can greatly speed-up the loan process by providing your lender with balance sheets, income statements (or tax returns), and cash flow statements for your business. Be sure to notify your lender of your personal debts, including credit card debt. In-depth sensitivity analysis on key factors of your operation is extremely helpful to your lender. Sensitivity analysis refers to factors such as your breakeven sales volume or selling price, or the maximum amount your sales revenues can decrease without impairing your ability to repay loans and other obligations. Sensitivity analysis is an extremely important management tool. You should also know the key indicators of financial success (e.g. current ratio, rate of return on assets, etc.) for your industry.

For established businesses, lenders usually require three to five years of financial information and projection for at least one. Be forewarned: You are responsible for providing this information! Your loan officer may help you construct these statements, but don't count on it. If you have a relatively new business or if you are planning to start a new business obviously, you will not have three to five years of financial information. In these cases, provide current financial statements and at least 1 year of projections. Be forewarned again: Don't submit accountant-prepared statements to your lender without examining them -- you should be able to understand and explain these statements!

Provide a business and marketing plan

A business plan and a marketing plan are extremely helpful to lenders, especially if they have limited experience in your industry or if you do not have a track record in the industry. Business plans lay out why you are in business (your mission), how your business is organized, what you plan on producing, and other information as to the make-up of your operation. Marketing plans detail your marketing strategies: who is your target market, who is your competition, what is your pricing policy, how do you plan to market your products, etc. These plans give your lender a better feel for your operation, where it is headed, and how well you have planned your business.

Lenders also like to see contingency plans. A contingency plan is your backup plan if your primary plan falls through, for whatever reason. Contingency plans show alternative uses for your assets, alternative marketing plans, and escape routes in case you want to get out of business. They show your lender that you are active in managing your business and that you have tried to anticipate major events that may impact your operation.

Be honest, professional, and ethical

Be honest with your lender. Provide accurate information. Let him/her know what your goals are, not what you think he/she wants to hear. Treat your loan office in a professional, ethical manner. Remember: once trust is violated, to renew a quality working relationship is hard.

Maintain open communications at all times, not just when you need help

Like most people, lenders hate surprises. They would rather know your proposed actions than what you just did. Too often agricultural producers decide to buy a piece of machinery and then ask their lenders for a loan to pay for it. Inform your lender of planned purchases or material changes in the operation or organization of your business. Minimize the surprise factor.

To summarize

Debt-financing is almost required in agriculture today. Choosing a lender to meet your financial needs is an extremely important business decision. To make this decision more manageable, view your lender as a business partner. Look for the qualities in your lender that you want to see in your other business partners. A thumbnail sketch of such a person might include honesty, professionalism, experience and knowledgeable in the industry, easy to work with, and genuinely interested in the success of your business. Don't settle for the first loan officer you meet or the bank that offers the lowest interest rate. Shop around for the right individual and the right institution. Look for someone with whom you can build an open, lasting, professional relationship. But remember, building a strong relationship requires hard work by all parties involved. You have responsibilities to your lender as well. Work hard to establish a strong relationship with your lender. You might just find that your lender is your best friend and biggest supporter in times of need.

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