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loan renewal

The one page plan

When refinancing your operating debt, also consider a plan of corrective action.

Recently, I presented at a conference for agricultural lenders in Wisconsin. During my session, I made the comment that if a producer seeks refinancing of his or her operating debt, that producer should also develop a one-page plan of corrective action. I emphasized that this recovery plan was the producer’s responsibility, not that of the lender.One lender asked what specifics should be included in the plan.  Well, that is an excellent question! 

First, a producer must articulate goals; business, personal and family. They should be one to five years in length, demarcating short from longer term goals. Remember that spouses, partners and key stakeholders should also be included in this process. Sometimes financial adversity requires one to take a step back and re-examine the basics. Can the business become profitable again? Can it be sustainable? Options may include continuing the business with adjustments and cuts, diversification, or liquidation. Regardless of which option is chosen, the goals will drive the process. 

Next, when refinancing is needed, cash flow is normally the limiting factor. When cash flow is tight, meeting short term operating and debt service requirements, along with expenses, becomes increasingly difficult.  So, how does one improve cash flows without compromising long run viability?  Well, off-farm income should be considered, or at least another revenue source that can sustain a draw. If the additional revenue comes from a spouse, partner, or even the main owner, perimeters still need to be set. How much support will be given, over what time period, and with what structure? 

Additionally, the plan will most likely require an assessment of production and marketing practices. For example, consider which input cuts will result in a short term cash flow boost without hindering overall viability. Lenders should examine what plans were present and whether they were executed. For producers, it will be important to show the capability to execute a given plan.  Often, successful plans will have trigger points and metrics used to periodically assess performance. 

Many successful one page plans outline cost strategies. Is the producer cutting the right costs? For example, while it may be tempting, is crop insurance the best place to cut for the business?  Specifically, examine all the business expenses and identify several areas that need to go on a diet. Of course, this includes personal withdrawals.  Remember that regardless of which areas they are in, significant savings require some hard choices.  

Finally, the plan should include monitoring business progress. Particularly in marketing and finance, regular monitoring is critical to business agility. This will most likely require a few key metrics in each area that can be used in meetings with the lender and advising team as a catalyst for discussion.

As the economic reset trolls on, more producers will need to refinance debt.  However, it could be the opportunity to summarize business strategy in one page.  While this list is not comprehensive, it is a good start for producers and lenders as they work side-by-side in delivering the business to its next chapter. 


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