This winter’s renewal season is perplexing both for borrowers and lenders. The borrowers, in some cases, are struggling with multiple years of challenges related to profitability and cash flow. Refinances of operating losses have been the outcome. This often replenishes the working capital; however, if no improvement in earnings results, another refinancing request often occurs two to three years down the line. What are some views of experienced agricultural lenders on this issue? Recently, lenders presented these ideas at the ABA National Agricultural Bankers Conference in Omaha, NE.
One lender stated that agriculture is in the part of the down cycle in which refinance and restructure of business debt results in loss of equity. He stated his best practice is not to allow the borrower to burn through all their equity on the balance sheet. Sometimes this is a hard pill to swallow for individuals involved in multi-generational farms; however, the preservation of wealth, not only for the business, but for the family, is an optimal outcome. This often involves having all family members at the table when making critical decisions and having serious discussions
Occasionally, lenders are going to say “no” to a borrower’s request. When a borrower takes the initiative to outline what changes will be made to improve the situation, lenders are more likely to give a “yes” answer. Sometimes this is an adjustment to production, price, cost, or management. It may mean cutting family living expenses or adding off-farm income. Still in other instances, it may involve going to another lender or a combination of lenders to put together a solution that can work. As one can see, it takes working side-by-side, not only with lenders, but also in some cases an advisory team.
Lending in agriculture is an art, not a science. This point was stressed by lenders at the conference. Often lack of repayment ability can stem from nonfinancial factors including human behavioral issues, misdirected aspirations, or uncontrollable events such as weather, disease, or tragedy. Numbers often do not tell the whole story and are sometimes symptoms of deeper issues. More ag lenders are discussing character as an important variable in the lending decision. Honesty, ethics and following through on commitments are now coming back en vogue in lender and borrower interaction.
Finally, the mental health of both borrowers and lenders can be challenges in these difficult economic times when a tweet or a change in political stance in the U.S. or abroad can alter economic factors. Maintaining a good exercise program and interacting with a positive group of individuals are key factors to promote resilience while navigating through this down cycle.
The opinions of the author are not necessarily those of Corn+Soybean Digest or Farm Progress.