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Finance First: Here’s what makes bankers nervous

Lenders want to know what’s keeping your farm from being profitable?

Our farm isn’t profitable, but my wife has a great off-farm job. Financially, we’re doing all right. So why is our lender always on our back about the farm if we’re doing just fine paying off our loans and notes? — W.L., Iowa

This sometimes happens when a farm operation is losing money, but something else — a side business such as seed or tiling, a spouse’s job, or other source of cash — is subsidizing the farm. Bankers can easily become nervous about this situation.

The bank fears your farm is not a viable business. It isn’t making money. It’s reliant upon an external source of funds — in your case, your wife’s job. The bank worries about what will happen if the off-farm job went away.

A bank wants the business to which it’s loaning money to be a viable business, in and of itself. It should be making money year over year. But right now, that business isn’t viable — it’s just being propped up. Is that truly the best use of time and capital?

The bank wants to know: What’s going on that’s keeping this core business from being profitable? And what are you going to do to move closer to that?

You need a plan where you show the banker your recognition that this external source of cash is keeping the farm going right now, but that you want the farm to operate on its own.

Present your plan to make that happen. Show the bank what it can expect going forward.

Right now can also be a chance to look at any gaps — what’s preventing the farm from being a viable business. Farming is fun, but it’s even more fun when we’re not losing money at it.

While it can often bring some frustration, the bank has to view the farm as a business in itself. And it’s also good for you, the farm leader, to look at your operation as a business that deserves to be profitable.

Frye is president and CEO of Water Street Solutions. waterstreet@waterstreet.org

 

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