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10 things that breakdown in borrower-lender relationship

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Dr. David Kohl examines why producers switch lenders.

During a webcast, a new agricultural lender in her first full-time job asked, “Why do producers switch lenders?” Of course, the answer to this age-old question is, “It depends!” Six decades of being involved with agriculture and various economic cycles has taught me that circumstances often vary as an industry or for an individual farm.

At the top of an economic cycle, such as the great commodity super cycle from 2007 to 2012, many producers switch lenders based on more attractive interest rates or terms. For example, changes were made when there was less than 50 basis points difference in interest rate. No money down, deferred interest, or interest only terms, particularly with nontraditional lenders, was an attractive setting to switch. Switching lenders based on interest rates and terms was popular amongst larger, growing businesses and young producers, particularly those who had not faced a down economic cycle.

Fast-forward to the economic reset from 2013 to 2019 and the pandemic years of 2020 and 2021, a shift to valuing the relationship over price comes more into focus.

A few years ago, a well-respected agricultural lender from the Midwest had a great philosophy for his agricultural bank culture. Be conservative in credit during the peak of the economic cycle. Be courageous during the down economic cycle, but be consistent as possible all the time. Lending, just like football or basketball officiating, requires consistency to minimize the roller coaster of emotions.

The following are a list of items that can lead to a breakdown in the borrower-lender relationship.

  • A merger between financial institutions can result in changes that weaken the relationship between a borrower and lender.
  • The lending and borrower management cultures are completely different.
  • A breakdown of communication between the relationship officer, credit officer, and loan committee causes a lack of consistency.
  • Deterioration of the lending institutions financial condition causes abrupt changes in loan policy to occur.
  • Regulatory institutions cause knee-jerk reactions as a result of financial stress in a specific part of the agriculture industry. As a result, the majority of the agriculture accounts are labeled stressed credits despite performing to the loan agreement.
  • Analogous to the old Eagles song, “New Kid in Town,” a new account officer or institution has a negative philosophy toward agricultural loans.
  • Your loan officer does not work here anymore. Hearing this can definitely increase one's blood pressure, even for the best-performing businesses.
  • The lender or the producer goes silent. In other words, either party stops communicating.
  • Workload: Burnout often occurs for highly productive agricultural lenders that get too much put on their plate.
  • The lender's financial incentive programs are based solely on growth and volume, not blended with credit quality.
  • Lack of flexibility and adaptability. Being resilient and consistent requires some bending as conditions change while working side-by-side towards a win-win situation.

The next few months and years will be a test as we see changes in the workforce and the economic environment. However, in my experience the best relationships are often made in the toughest of economic times.

Source: Dr. David Kohlwhich is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. 

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