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Have a Backup Lender


Farming is a business that requires large amounts of capital, and few of us can run a farming operation without the help of a lender to provide part of that capital.

I’ve had an increasing number of clients this past year who have had problems getting their line of credit renewed. Most are involved in cattle, hog or dairy businesses that, as I describe, have been “financially field dressed” the past 24 months.

I have seen some great business plans derailed because of regulatory requirements, changed personnel, changed credit standards and a whole litany of other reasons.

That’s sad since livestock and dairy operations are businesses that require greater and more intensive management than crop operations. One would think they should be rewarded for their efforts, but as we all know, life is not fair and cycles exist in every business. As long as we have the two basic human emotions of greed and fear, we’ll continue to have cycles.

Long ago when I was with Farm Credit, I had a director who had all of his credit with Farm Credit but paid a $20,000 commitment fee for a $5 million line of credit with a large commercial bank. When I quizzed him about it, he said he used that as a backup line. If something would happen to his relationship with FCS he could have his current lender completely paid off by the end of any day.

He said his father taught him that and he would never be hostage to a one-lender relationship. Good strategy.

I think it’s good risk management to establish another lender relationship as backup if you need it. There are many potential changes in the ownership, credit standards, procedures, personnel and regulators of your current lender that leads to the conclusion that things could change quickly at any time. You need credit and commitments to carry on business and reach your goals. That means you need a reliable lender – if not on board, then on the bench.

How do you get a reliable lender on the bench? The first step is inviting them to review your financial statements including balance sheets and profit and loss statements, past and projected.

The next step is get them involved with your management team so they can become familiar with your entire operation.

Allow them to drill down to the heart of your operation including your vision, mission, strategies, goals and tactics. Let them interview your employees, management and owners.

Share with them your competitive strengths, unique challenges, opportunities, threats and weaknesses. Transparency is a keep to establishing long-term symbiotic relationships with lenders. 

Lastly, obtain a commitment in writing if they would finance your operation and under what terms. If they could not finance it, have the lender put in writing what you would need to do for them to finance your operation.

You will likely learn a lot about your operation from a third party objective look. That alone might be worth the effort.

If the bench lender requires a commitment fee, consider paying it. It may be risk wise decision if things change when you least expect it. 


January 2011

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