Growers with tighter margins and a weak marketing program may face higher interest rates and/or require more collateral to secure a loan, says Kent Kramer, assistant vice president at Delaware County State Bank & Trust, Delaware, OH, and also a farmer.

“That is assuming they get approved at all,” says Kramer, who deals with farms of all sizes and farmers who are good and bad marketers. If they don’t have a marketing plan, they’re probably leaving some money on the table.

“A bank loan committee looks at a producer’s management skills and marketing abilities. They compare the income per acre to industry and local trends. If farmers don’t market well, it will show up in the analysis process and that’s a red flag.

“The most common mistakes I see are among growers who don’t closely track their income vs. expenses or don’t watch the market and sell during a spike in prices,” Kramer says.

He says his more successful farm customers operate them like many large-scale commercial businesses, with detailed budgets, marketing plans, financial plans, transition plans and outside consulting partners.

“The smaller and less-sophisticated operations often lack the higher level management needed to quickly adapt and change, and often have smaller profit margins,” says Kramer. “They’re still good clients, but I’m always concerned that in tough times it may be difficult to fund that type of operation without some other strengths like off-farm income or additional collateral to secure the loan.”

Marketing and financial plans should be clear. “If I can communicate the farmer’s plans to the loan committee, it improves its confidence level in the client’s management skills,” Kramer says. “If the loan committee believes the client is a higher risk it will mitigate that risk in the form of higher interest rates and fees.”

Kramer has advice on selecting an ag lender, in light of the weak economy. “First I would reach out to other farmers,” he says. “They may not say where they bank, but most farmers I’ve met are willing to tell you what bank they would never set foot in and why.

“Then quiz the banks about their plans for ag lending. Most banks have defined their markets and will let you know if ag is in their long-term plans and how they intend to be involved in it,” Kramer says.

“If you have a lender, ask them to point out what they see as strengths and weaknesses in your operation. Then you will know where to focus more attention.

“Finally, even if you have a good banking relationship, don’t be afraid to talk to more than one lender. Competition for your business may benefit you in the form of a lower rate or fees. In the event something does change with your current lender, you will have a backup plan,” Kramer says.


November 2010