The other day, I was at an agribusiness lending workshop where Curt Covington, a well-respected lecturer and Executive Vice President at Farmer Mac in Washington D.C., had a great quote. He stated that, “The larger the business and the loan amount, the more character counts in the loan analysis.” Character is one of the five Cs of credit used by agricultural lenders, along with cash flow, conditions, capacity and collateral. While character counts in all loan analysis decisions, why is it particularly true for large agribusinesses?
One only needs to examine some of the recent blunders of producers operating large businesses to understand why character is so important. For example, 20,000 head of cattle were missing when a producer sold the same pen of cattle over and over again. This incident caught not only the primary lender, but five other lenders, some other producers and the stockyard.
In one case in the Midwest, lenders could not locate 40,000 head of missing livestock. These disappearing cattle were not the result of the unfortunate, massive floods that have persisted in that region.
Another case of fraudulent activity involved a family that was “cooking the books.” They provided false information by overstating revenues and assets. In this case, it would take Sherlock Holmes to unravel their nasty schemes.
Fraudulent activities are not limited to livestock producers. A grain producer reported $14 million of grain inventory in storage. To the lender’s dismay, the collateral inspection uncovered only $2 million of grain inventory in the bins. In this case, the lender was fortunate enough to have sufficient collateral to shore up any loan losses.
One must be aware that as more of these dishonest transactions occur, credit standards will become tighter for the whole industry. There is an old saying that, “It only takes one bad apple to spoil the bunch.”
In some cases, fraudulent activities began with a transaction yielding poor results. The best of people attempt to “hit the jackpot” to overcome the bad decision, only to dig the hole deeper. In other cases, fraud is a result of an ego or lack of priority in values. In some situations, poor character is a result of alcohol, drugs, or other personal issues.
In summary, know who you are conducting business with. Unfortunately, a handshake, while still important, is being challenged and loan relationships require more formality and agreements. As demonstrated in these cases, character counts in a big way.