At some point in your ag business career you are likely to seek long-term financing for your operation. Reasons may vary from purchase money to refinance existing debt to freeing up working capital. Whatever the reason, the process is very similar. Your term long-lender may be different from your bank in many ways, but the one thing that is very similar is the need for quality financial information. Keep in mind you are likely a new customer to your long-term lender. They do not have the borrowing history or past information you’ve shared with your bank over time, so they will usually need even more information. If you have struggled with your bank or your term lender, these are likely the areas causing the most consternation:
You have not provided quality historical and current financial statements (usually 3 years):
Preferably financial statements are CPA prepared of ‘reviewed’ quality or better. A lender may accept less, but typically more verification is required along with more questions. If there are large swings in assets and liabilities or revenues and expenses from one year to the next, explain these in detail. Do not leave it for the lender figure out; they may assume incorrectly. Relying on tax returns makes this process for the lender more difficult because cash entries must be converted to accrual. If your operation has grown to where you can afford a controller and/or a CPA, hire one. They almost always pay for themselves in time and money saved dealing with lenders, attorneys, crop insurance companies and anyone else requiring this accurate and organized financial information.
Your budget projections are inadequate:
You will need to prove that historically you serviced your debt and you will be able to service any new debt. The historical proof is generally shown in the income statements mentioned above. The future proof is in your budget projections for the coming season. These projections must be reasonable and generally based on your historical actuals. Sales contracts of commodities should be produced. If your operation is growing, you will need to prove new or developing properties can produce as you are projecting. At least a 12-month cash flow should be submitted, or more if developing properties.
You have not told your story effectively:
Every company that has been in business for any length of time has a story to tell. You need tell yours to your term lender in very concise and accurate terms. Most operations have downturns now and again for many reasons. These need to be explained in realistic terms. Most lenders can tell when the truth is being stretched, so don’t. Tell what has happened and explain how you have worked through these hard times. This applies to projections as well. Be realistic in your assumptions. It would be wise to have some form of risk management plan presented to your lender showing best, likely, and worse case scenarios. In the worse case scenario, what is your plan to get your debt paid?
The items mentioned above, along with borrowers not presenting a complete loan package to the lender up front and dribbling in information over a long period time, will surely get you on the wrong side of borrowing relationship from the start. Try to work on these tips, and your borrowing experience will go much smoother and faster. And remember, communication is always key – stay in frequent contact with your lender. Don’t be afraid to ask questions along the way.
If you’re ready to refinance or make your next land purchase and have questions, start the process by contacting a Conterra Ag Capital lending specialist today.