I teach a course in the University of Manitoba’s ag diploma program that has an emphasis on lending and how financial management information factors into lending processes and decisions.
Half to two-thirds of the students typically have plans to return to the farm. The balance either plan to enter the agriculture industry or are unsure of their future.
Not many years ago, if you were to survey a diploma class, 90 percent or more of the students came from farms. It’s now closer to 70 percent. The rest come from towns and cities with no direct ag connections.
Times change, but one thing remains constant. When you look out across a class, most of the male students are wearing ball caps, some on backward. Some of the female students will be wearing them, too, but not nearly as many.
In fact, in the class I was instructing late last month, every student was wearing a ball cap.
Full transparency here. I have never worked for a financial institution and therefore, have never been involved in the process of lending money to farmers. However, I have been in countless discussions with lenders and with farmers about lending or borrowing money. I’ve had the opportunity to observe and learn about things that make a difference when it comes to farmers’ ability to borrow money.
I’ve observed situations where financial institutions have seemingly bent over backward to find ways to provide financial support to farm clients, where the financial situations were so iffy that I didn’t think there was any chance of the loans getting approved. Conversely, I’ve witnessed farms that had strong financial situations but were unable to get their loan applications approved.
You may be wondering how that could be? It’s a good question. Isn’t lending about financial ratio and security (risk) analysis? Certainly, but there’s another important aspect that factors into the lending decision-making processes. And that’s management.
There’s a collection of management attributes referred to in lending as the five Cs. It used to be three Cs a long time ago. We teach that there are eight Cs but regardless of the number, there are generally accepted attributes, most of which are primarily related to management, that form part of a lending decision outcome. Google the five Cs of lending and a bunch of information resources pop up.
The lending process includes the relationship manager who a farmer deals with directly putting together and submitting a credit submission. The credit submission includes financial analysis and comments on the Cs referred to previously. The application is risk rated and a decision is made whether to approve or deny the application. If approved, terms and rates will be determined, being a function of the risk rating. An application fee will typically be included, which will be influenced by the lender’s assessment.
In the process above, the easy part is the numbers. They can be quantified. The more challenging part is the determination on management. Two of the Cs that affect this are character and communication.
There are simple things you can do to enhance a lender’s assessment of your character and communication:
-
- Meet with your lender in person a few, maybe four, times a year, even if you aren’t looking to borrow money. It’s about entrenching the relationship, which goes a long way in the trust category.
- Lenders like to know what’s happening on your farm. Use these sessions for updates, both when there are positive and negative things happening. Importantly, if there’s a negative impact looming (such as drought), tell the lender what your plans are to address the situation.
- Dress appropriately — like a businessperson. Don’t wear dirty clothes or boots. Take your hats off. Which is what I told the students in the class to do when the time came for them to meet with a lender. I’m certain they thought I was out to lunch.
I’ll bet though, that when Mark Chipman (co-owner of the Winnipeg Jets) has a meeting with the Jets’ lenders, he isn’t wearing a hat. He will want to convey an image of professionalism and good business management. In one way, there’s no difference between the approach Chipman will take when meeting with lenders and what any farmer should take. Both will be proud of their businesses and will want to present themselves accordingly.
Two summers ago, a farmer came to a peer group meeting I was facilitating. He announced to the group that he had just recently visited with his lender and presented his plan in person. The lender was impressed. The lender, in response, unilaterally indicated that the farmer’s operating loan interest rate was being reduced by 25 basis points. The lender said that it was because of his perception of the farmer’s management competencies (at least partially influenced by his character and communication).
In the situations I mentioned, where farmers with extremely weak financial positions had financing approved and conversely farmers with strong financial performance metrics were denied financing, the major difference would have been a function of character and communication.
What can you do to enhance how your character and communication are assessed? A few steps can literally save you thousands of dollars in interest and fees.
If you would like to speak to one of our consultants about this topic, contact us.
