Remember the three Cs when considering a lender
One of the most important teammates you’ll have in your farming or ranching operation is your bank. Lenders have significant influence on the eventual financial outcomes for you and your family. And their interactions with your farm can have long term effects – both good and bad. Since your lender and bank can have a profound impact on your financial life, it’s wise to step back and simply ask, “What makes a good agriculture bank and lender?”
I am very appreciative of a few quotes that have framed much of my core lending philosophy. One of which is from the famed and revered Dr. David Kohl, a professor and ag lending expert. Dr. Kohl has often encouraged ag lenders to be “conservative in the good times, courageous in the tough times and consistent above all.” I couldn’t agree more.
Conservative in the Good Times
You may think it doesn’t matter what bank you work with when times are good, but as an old adage states, “The worst loans are made in the best times.”
When times are great, it’s easy to believe they will roll on forever – a term some refer to as the “recency bias.” This is often when leverage is piled onto the balance sheet and payment obligations are taken to an unreasonable level. A good banker will keep you “rowing close to shore,” even when others might be straying far from it.
In the last great boom in production agriculture, the wise decision was to reduce leverage and pile up working capital in preparation for the next period of leaner times. A good banker encourages this kind of thinking – even if it results in lower loan totals for the lending institution.
Courageous in the Tough Times
The past few years have not been easy for those of us working in the agriculture industry. While it is true that banks have undoubtedly had to make some adjustments during this period, I believe, for the most part, many are remaining steadfast in support of their customer base.
The last thing any producer wants is for their bank to pull back during the most challenging times. So, how can you help your bank be courageous in tough times?
It is critical that borrowers proactively address any issues the bank expresses concerns about. Also, be quick to make sure that you are doing everything you can to make the bank confident in the security of their loans with you. This kind of working relationship – marked by strong communication and mutual respect – will result in both parties finding favorable outcomes.
Consistent Above All
Many items on your worry list are simply outside of your control – timing, rainfall amounts, market price direction, weed resistance, death loss in your cattle operation, etc. Agriculture is inherently an inconsistent business. Therefore, it is prudent to remove uncertainty as much as possible in other facets of your operation.
A great ag bank is consistent. In an up-and-down business like agriculture, it’s easy for cash flow performance and collateral values to move around significantly. Thus, when you consider your lending partner, it’s appropriate to ask how they handle the cyclicality of the industry, and why they feel they have strong staying power in the industry.
Conservatism. Courage. Consistency. These items are hallmarks of being a great ag bank. As you consider the choice of who you will work with – I encourage and challenge you to demand a lending partner who exhibits all three.
Lance Albin is senior vice president, agribusiness commercial lending officer at UMB Bank.