By the Numbers

Walk in a Farm Borrower's Boots

Over-collateralization, hedging policies and a credit officer's trustworthiness are a sample of issues that concern farm borrowers. (DTN photo by Greg Horstmeier)

To communicate effectively, we first have to get beyond the listener's concerns and perceptions that either distort or screen out much of the message we are trying to send. Whether we like it or not, the perception in the mind of the listener is his/her reality. In lender-borrower relationships there are three times when overcoming these barriers is particularly important: (1) When calling on a prospect; (2) when communicating expectations at the time the loan is made or renewed; and (3) when counseling an existing borrower.

Lenders routinely deal with the risks that a borrower presents in making credit decisions or in managing their loan portfolio. But how often do they stop and consider that one of the major business risks faced by borrowers is the uncertainty that the lender presents? To the extent they can address or alleviate the borrower's uncertainties, preconceived notions, and perceptions, the more effectively their message is going to be communicated.

The focus of this article is on the concerns and perceptions of many agricultural borrowers. They are presented as questions in the first person to reflect the borrower's point of view. The list is by no means complete but hopefully it will trigger lenders to periodically ask themselves what the borrower is concerned about and what they need to do in order to get their message across.

1. Will my loan request be approved?

2. Can I trust what the loan offer says? Either through personal experience or from what I have heard or read, I am aware that lenders have said or implied one thing and then later done something else.

3. Will I get an answer in time to pursue other financing alternatives? A related concern may be whether I'll find out soon enough to take advantage of the opportunity I need the credit for.

4. If I'm turned down, what is the probability I can get financed elsewhere?

5. If I am approved for less than the amount requested, will the amount denied mean I miss what I consider a critical need or what I feel has the highest potential payoff? Will I be forced to sell assets or cut back?

6. Will the terms of the loan force an earlier sale of commodities than I feel would be best from a marketing strategy standpoint?

7. If I hedge, will the lender stick with me and finance margin calls, or will I get hung out to dry if he gets nervous?

8. Will the lender accept my projected performance figures?

9. Am I going to be required to prove information I don't have?

10. Will additional credit be available during the year if the situation changes from what is expected? For example, what if I have to replant, if input prices increase or there is an overrun on constructions costs, etc.?

11. If a carryover debt situation develops, will I be allowed to refinance the carryover and if so, what will be the repayment terms?

12. If my loan(s) need to be reamoritized (restructured) will the lender work with me?

13. If part of my loan request needs to be over lined (shared with another institution), how will the participating lender react? This is of even more concern if there has been a management/ownership change at the participating institution.

14. What will the lender's reaction be to events I can't control? Not just weather or commodity prices, because I can partially insure or hedge against those events, but what about decreases in land, equipment, or breeding stock values? I may be performing as agreed, but my equity is going to be eroded.

15. Are changes expected in the bank's management or loan policy? If so, how much notice will I have and how much time will I have to adjust?

16. Will my loan officer change? We have developed a sense of trust and a close working relationship. He understands me and my operation. Will I be forced to work with someone new?

17. If my lender experiences loan losses, or problems with other borrowers, how will that affect his dealings with me?

18. Is the lending institution going to fail, be sold, merged or branched? If so, what happens then?

19. Who else besides the loan officer is going to see my information or know about my situation?

20. Will the loan agreement be written so tightly that I can't effectively manage my business?

21. If it becomes necessary, how much time will I have to sell assets or to get refinanced?

22. Is my lender committed to serving agriculture? I have heard stories that a lot of lenders are getting out of agricultural lending.

23. Just how strong is my lending institution and is it in any trouble? I know they aren't going to say, even if I ask, because of the fear of the consequences.

24. What are the local implications of the bank regulation changes and financial regulators becoming more aggressive like I've read about in the paper or heard on the news?

25. If I ever need it, will my lender be willing to work with the Farm Service Agency or some other government lending agency on a guarantee or subordination?

26. How much collateral is enough? Will my lender want to commit everything I own or require collateral worth several times the amount of the loan?

27. If my lender secures all my assets, will I be able to get any of the collateral released if I want to sell some assets or refinance part of my debt with another lender?

28. What is my lender's loan policy? What are the standards I am expected to meet? Even if I know the standards, is there any tolerance, i.e. can weaknesses in one area be offset by strengths in another?

29. How will my credit be affected if my lender finds out about my marital problems or if I end up getting a divorce?

30. How much is my lender going to force me to tell my family know about my finances?

31. If I fail, i.e. have to sell out, am foreclosed or am forced into bankruptcy, what will my family and the community think of me? What would happen to my family's standard of living? Will I be able to find other employment?

32. What have I done that my lender doesn't trust me anymore? I have always paid as agreed and have never had to provide all this information before.

33. What is the cutoff point in terms of carryover, equity margin, cash flow margin, etc. at which my lender would no longer finance me?

34. If my capital debt has been or is going to be structured on the basis of annual pay downs and renewals rather than a term loan, what assurance do I have that the loan will be renewed? Also, am I going to be hit with additional collateral requirements at the time of renewal even if I perform as agreed?

35. Are the repayment requirements on capital debt going to be in line with my repayment ability and the useful life of the asset being financed? It seems like my lender is setting me up for potential repayment problems by requiring a three-year payback on a loan for a piece of equipment that I'm going to use for five to 10 years.

Nothing presented in this article is new. But, it's so easy for lenders to get caught up in their own concerns and pressures that while they may understand where the other person is coming from, too often, they may not fully factor the listener into their communication strategy.

If you agree with what I've written, I encourage you to share this article with your lender, then sit down and discuss the issues that concern you most.


Editor's note: Danny Klinefelter is an agricultural finance professor and economist with Texas AgriLIFE Extension and Texas A&M University. He also is the founder of the mid-career Texas A&M management course for executive farmers called TEPAP. To read all of Klinefelter's recent DTN columns go to…