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2018 Credit Management, Relationship Advice

Southwest 2018 Outlook: In today’s markets, where profits and cash flow are hard to come by, it’s important to look at the borrower/lender relationship as a partnership.

Managing your operation’s credit needs is a challenge in any environment, but even more so in the current cycle of low commodity prices. Debt repayment rates have been a little better than expected over the last couple of years. Above average yields across the region in 2016, particularly cotton yields, bolstered producer finances and debt repayment rates last winter.  Government payments from the 2016 crop (PLC and ARC) that were paid in the fall of 2017 will also provide some revenue support for many producers to pay off operating loans and avoid carryover notes this winter. But the near-term commodity price outlook suggests continued low prices, extremely thin profit margins, and tighter credit standards.

In today’s markets, where profits and cash flow are hard to come by, it’s important to look at the borrower/lender relationship as a partnership. Rather than focusing solely on your own business interest, both parties should recognize their success is highly dependent on the success of the other. That’s not to say there won’t come a day when one of you will need to find a new partner, but consistently those that excel in the good times and survive in the bad are the producers and bankers that work together as partners. The following are 5 key factors that make for a good partnership.   

Know your own business and be able to describe your plans, processes, and business decisions effectively. Producers should maintain good records, financial statements, and budget plans for their own business benefit, but also as a tool to explain their operation to a lender. All too often cash flow budgets and financial statements are only developed because a loan officer does it for the borrower. Lenders should also be readily able to describe not only the credit process, but also the business incentives, regulations, and other factors that influence the bank’s decisions as well as the financial health of the bank and their ability to provide a sustained source of credit.

Understanding your partner’s business is obvious for the lender, but it should go beyond the basics of the loan application and approval process. A good ag lender learns the business of farming from crop and animal production management decisions to marketing and risk management strategies. Likewise, a good borrower will teach himself or herself the business of banking, including the process and people that drive lending decisions, other banking services, as well as the general financial stability of the bank. 

Trust is critical to any partnership. Lenders count on borrowers to be open and fully disclose their business dealings, contractual obligations, outside partnerships, and other sources of credit.  Borrowers need to know they can trust their lender to stick to a financing commitment, just as the lender needs to know the borrower won’t stray from the production plans he agreed to finance. There’s no room in the borrower/lender partnership for secrets or hidden agendas.                                                                       

Being as proactive as possible is not only a good personal business strategy, it’s also good for your partnerships. The last thing either borrower or lender needs is a surprise. If you have a new business idea, see your credit needs changing, or a current plan is not working, involve your lender as soon as possible. Similarly, if credit requirements, availability, or lending policies change, the lender should communicate those changes early so their borrowers can be prepared.  Coordinating plans early creates better buy-in between partners and a stronger commitment to follow through.

Ongoing communication is essential to a good financing partnership. Even when everything is going exactly as planned, it’s important to maintain contact to help build every other aspect of the partnership. The last thing either party wants is to only have a conversation when there is a problem to be solved. 

Typically, this annual series might discuss the outlook for ag credit markets. Clearly, we all can see the near future will bring credit challenges, with low commodity prices, thin profit margins, uncertain asset values, and the potential for rising interest rates. The standard advice applies:  value your liquidity, don’t get overextended, only finance what will cash flow. Maybe just as important, whether you are a borrower or a lender, is to find and develop a quality credit partnership.

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