Businesses have a lot of similarities to sports teams and farming is no different. During times of adversity, you need to have backup plans and personnel.
This post was inspired by a recent press release announcing a new option for farm financing (click here to view it). In the press release the company makes the following announcement:
“The Company also announced that it has originated its first loan under the FPI Loan Program to a major Midwest farm operator. The loan is due in January 2016, has a fixed annual interest rate of 8% plus customary upfront points and fees, and is secured by first mortgages on farm real estate at approximately 50% loan-to-value. The loan will provide the borrower additional working capital during the fall harvest.”
If you consider the “customary upfront points and fees”, it’s likely that the APR of this financing is 10-12%. Most farm operating notes that I’ve looked at in the last couple years have interest rates that range from 3.0-4.5%. This large Midwest farm must’ve gotten into a real bind to be forced to take on short-term debt with a rate 2-3x the normal rate.
The press release also states that this loan is being underwritten at approximately 50% loan-to-value of the farmland real estate securing it. If so, it is likely that this operator could’ve secured much less costly financing. The trouble is that it takes time to find a new lender and close on a new financing package. That’s why you need a backup!
Given the cash flow of farming is very seasonal, a farm never wants to be faced with the scenario where their loans are “called in” during the growing season. While this is unlikely, it has happened before and will happen again.
This winter after you prepare your updated financial statements, make it a point to visit 2-3 bankers in your local area. Be upfront and tell them that you’re simply looking to make a contingency plan with your farm financing. Most bankers would be more than happy to review your operation and give you a read on their appetite for working with you if your current banking situation changes.
A supportive banker is key to your farm. The trouble is many high-level decisions are being made at the executive-level of the bank above your banker’s “head”. With our current challenging farm economy, the risk appetite for banks and their regulators is under pressure.
Don’t be blindsided by a change in your banking relationship. Make it a point to develop relationships with a couple additional bankers in your area. A few hours of your time per year could save you a substantial amount of money and a huge headache in the future.
We are all about managing risk and you owe it to your farm and family to manage your banking relationships every year.
Nick Horob
Passionate about farm finances, software, and assets that produce cash flow (oil wells/farmland/rentals). U of MN grad.