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Why your lender might change their requirementsWhy your lender might change their requirements

Finance First: Maintain more than one lender relationship and ask them early and often about any changing expectations.

Darren Frye

September 12, 2023

2 Min Read
Lender handing money to customer
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My banker is asking me to put more money down than usual on some purchases. He’s talking a lot about debt service ratio and some other ratios. I’m frustrated because it feels like they’re suddenly changing the game. What’s going on with these changes? – N.C., Minn.

As uncertainty rises, the nature of banking is to become more conservative. Lenders are “pulling their oars in” – asking for more equity. It’s the nature of the regulatory environment they must operate in, but it’s also important to understand the type of “game” they’re playing.

Everyone is playing some sort of game. If you’re a lender, the game is to make sure you’re going to get paid back. One way they calculate that is to understand if projected cash flow will be there to service the planned debts.

Make sure you have more than one lender relationship so you don’t feel beholden to a single institution’s change in requirements. Ask lenders to explain key ratios, any minimums they’re asking for, and how they’re calculating inputs into those ratios.

Agriculture is very volatile from year to year. Ideally, farms can use three, four or five-year averages to help smooth spikes in inputs and outputs, but different banks may approach this differently than you do. Have conversations with lenders early and often to find out what’s changing with internal expectations, the regulatory environment, and what kind of inputs they’re using in their calculations.

Be proactive by knowing your own numbers. This may help you defend yourself if you perhaps find they’re not using accurate information. What they present to you isn’t gospel – it’s simply their approach to try to understand the future and manage their risks. You also have the responsibility to effectively tell your own operation’s story.

Interest rates likely aren’t going to suddenly go back to 3% any time soon. The better you can help your primary lender tell your story to get the approvals they need, the better position you can be in. Having these conversations much earlier than you need to or have done in the past will be helpful.

About the Author(s)

Darren Frye

CEO, Water Street Solutions

Darren Frye grew up on an innovative, integrated Illinois farm. He began trading commodities in 1982 and started his first business in 1987, specializing in fertilizer distribution and crop consulting. In 1994 he started a consulting business, Water Street Solutions to help Midwest farmers become more successful through financial analysis, crop insurance, marketing consulting and legacy planning. The mission of Finance First is to get you to look at spreadsheets and see opportunity, to see your business for what it can be, and to help you build your agricultural legacy.

Visit Water Street Solutions

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