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Lender explains what’s needed for smooth loan processing

By Joshua Rynes

As I sat at my desk formulating how to attack the day, I received an email with an interesting question: “What would you like to see a farmer bring to the table when making a loan request?”

In all honesty, a lender wants to take as little risk as possible while making the most money possible. Farmers need to show they are a safe bet to repay the loan—that they are good at farming and keeping records. The difference between an approved loan and a denied loan can be as simple as how a farmer provides the farm’s financial information for the lender to review. Here are a couple of scenarios to help you understand what your lender needs for a loan request.

John and Jane Doe are in their mid-40s and have been customers of the bank for many years. They grow crops and keep dairy cows. Jane also raises vegetables to sell at the farmers market and is in charge of the finances for the entire farm.

Each year I schedule a meeting with them to discuss their business and financial needs for the upcoming year. My goal for this meeting is to walk out with a fiscal year-end balance sheet, production information, income and expense numbers, a list of any assets bought or sold in the year, and a projection for the upcoming year that would also include any potential new loan requests.

In the first few years, I would come out to the farm and sit down at the kitchen table. After an hour of sharing stories and pictures I would start asking for the information needed to complete the annual loan request. We would start with the balance sheet. John would reach into his pocket and pull out a crumpled up paper towel stained with iodine from teat dip. On this paper, John had all of his cattle numbers.

Next I would ask John about any inventories they had at year end. John would write down the number of piles of feed he had and the dimensions of the silos, and guesstimate how many hay bales were wrapped up out in the field.

Next I would provide him a machinery list which he would glance over and agree that everything was the same as last year. Jane would estimate how much cash was in the checkbook. For the debt, she would say they made all of their payments so the balance at year end should be the prior year balance minus the payments they made.

For the projection, John would say, “Well, I don’t really see anything different happening this year so let’s just use last year’s numbers.” Jane would then hand me a shoe box full of various check stubs for income they generated along with all of the billing statements and receipts for the year’s expenses.

To get the production information from the previous year, John would run out to the barn and grab all of the bulk tank slips and feverishly add them up. He would then guess as to how many cows he averaged milking for the year to get production per cow. For crop production, he would figure out how many wagonloads of each crop he harvested and guess the capacity of each wagon to get a number.

They had now provided me with all of the information I needed to do the renewal and provide operating money for the year. As I gathered my things, they asked the most dreaded question a banker wants to hear, “So how long before you have the new loan approved?” Based on the simplicity and size of the request, one would expect a decision to be made and have the loan closed within the week. However with how they had provided numbers, it ended up taking 3 weeks.

Why so long? I had to build a balance sheet in the format that is accepted by the bank and the ag lending community from the numbers John and Jane had provided. I had to sort out all of the items in the shoe box and categorize them to the best of my ability. This had to be done just to build a projection for the upcoming year. Once all of this was done, I would have questions for John or Jane to answer, which would typically take a day or two for them to respond.

Once I was confident that I had all of my questions answered I would tell John and Jane what the terms of the new loan were to be. In those early years John always griped about the high interest rate we were charging and the time it was taking to get the loan.

Fast forward 20 years and here is how our annual meeting happens: Jane sends me an email around the holidays giving me dates that they are available to meet, noting they’d prefer to meet right away in January. A few days before the meeting, Jane has me email her any items I would like on the agenda and includes the financial statements. I show up to the meeting and am handed an agenda that lists time to catch up on news, recap of the previous year (production, prices, projects, income and expense statement), upcoming year projection, and banking details (loan renewals, existing interest rates, new money needs).

Along with the agenda, Jane hands me a completed balance sheet, income/expense statement, and a projection. This allows us to actually talk about the business rather than just gather data. Sometimes I even get the numbers ahead of time so I can review and make sure any questions I have are answered. Before I leave, John and Jane negotiate the new loan rate and terms. I am able to commit to a one-week turnaround time.

As John and Jane have become more experienced farmers, they’ve also become better business managers. By following their second example of providing good documentation, you will have a better chance of getting a loan. In times where margins are tight and credit isn’t as readily available, you need to be able to show your lender that you know your business. Just being a good producer doesn’t mean what it used to 10 years ago.

 

Joshua Rynes is the vice president of the Wisconsin Ag Business Banking Team at Bremer Bank.

 

 

From the March | April 2019 Issue

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