Hints in presenting your needs to a financial institution
Introduction
Your business plan
The following hints are taken from the NSW Agriculture Agnote "Financial management during drought recovery".
Relationships between farmers and their lenders have gone through a period of significant change over the last 15 years, primarily as a result of the stock market crash in the late 1980s and the rural recession. Bankers have changed the way they appraise loans; farmers need to change the way that they prepare for loan applications and annual reviews, particularly in the context of drought.
At your annual review, the bank evaluates not only your performance but also your perceived level of risk. The risk is reflected in your margin or in the additional price you pay for the loan.
Lenders used to be more preoccupied with security than the ability to repay. They used to ask borrowers to submit a list of assets and their value, from which a borrowing limit would be calculated depending on the type of security offered. However, the collapse of the property and stock markets in the late 1980s, coupled with a rural recession and the large bank losses that followed, particularly on corporate loans, rendered this technique virtually useless and also very costly to the banks.
In response, the banks initiated a new technique of risk rating loans. This is a grading system which reflects the quality of the loan and hence the risk to the bank. It is also used to reflect the margin the customer is expected to pay. Obviously, the riskier the loan, the higher the margin.
This risk rating technique has switched the emphasis from security to the ability to repay both principal plus interest. While banks often will not divulge the basis for their grading systems, they usually cover three broad areas:
As banks are now reviewing a broader range of aspects of farm businesses, increasingly they request comprehensive business plans at the customer’s annual review.
For a real world case study of one farm family changing relationship with their bank, see the "Knowing the Bamk Manager Helps" article in the Good Times Hard Times magazine.
A business plan is far more than a financial plan. It is more comprehensive and covers all facets of your farm business. It should set out, in a logical manner, the current position of your business. The basic components of your business plan should include the following:
A clear, concise title page, with your business name and contact details.
An executive summary, outlining the amount and type of loan applied for, giving the bank the opportunity to accept, modify, improve or reject the loan. Clearly state the purpose of the loan and how it will be repaid. Also, briefly describe the business structure (sole trader, partnership, trust or company).
A mission statement, detailing your goals and direction of the farm.
A management profile. One of the most important resources of a farm business is its staff—remember that banks lend to people, not to the land. For this reason it is important to highlight the experience, qualifications and background of all members of the farm family.
A physical plan. Banks place a major value on your major asset or land. It is in your interest to present it in its best light. Include location maps or photos, discuss any special attributes, such as highway frontage, closeness to town, or soil fertility. If you have a property management plan, offer it.
Enterprise or production plans. Discuss such things as additional costs over and above the usual as a result of the drought breaking, or expected commodity prices, both paid and received. This enables the banker to understand the differences in the budget you forecast when the drought breaks compared with your actual performance in previous years.
Development plans. Highlight any strategic plans or significant changes from previous years, e.g. anticipated capital purchases in coming years, or changes to enterprise mix or management control. Discuss any areas where there is a slightly longer pay-off period, such as breeding programs and spreading lime.
Marketing plans. Banks like to see attempts to manage income as well as costs. Examples may include negotiating reduced commissions; having a range of selling methods, such as CALM (Computer Aided Livestock Marketing) or selling direct to feedlots; or perhaps production changes in micron (fibre diameter) or breed to meet client requirements. This section also provides the opportunity to include copies of any media articles received through the year.
Financial plans. By placing this section last, the bank has had a chance to build up a perception of what the finances will look like without any unpleasant surprises. Banks will often ask for the last 3 years’ tax records, but they should be accompanied by the last 3 years’ management records, giving the banker a more complete picture of the farm’s performance. They will also expect a cash flow statement along with a list of assets and liabilities. Also include details of any insurance policies held.
This sounds like a lot of preparation but it will reap significant rewards when negotiating at your interview. It is often said ‘the art of negotiation is in the preparation’. Remember that the depth, detail and understanding demonstrated in the loan proposal document will reflect the character, attitudes and values of your farm business. It will show your ability and commitment to servicing the loan, repaying the capital, and generating a return on the bank’s investment in your business. It will also directly influence the bank’s perception of your professionalism, and hence the margin you pay.
More information on business planning for farm business is available on the Australian Bankers Association website: www.bankers.asn.au and follow the Business Information links. A template business plan for agribusiness developed by the National Australia Bank is available HERE.
The Australian Bankers’ Association has developed a guide
for farmers called
Understanding the Cost of Farm Finance . The guide is a detailed discussion
of the key factors affecting risk as perceived by lenders, and though somewhat
technical, it does give a good introduction to a wide range of technical financial
terms. To view the guide, go online and CLICK
HERE.
It is important for you to be aware that every year the banks are designing new products. It is therefore important that well before your annual review you investigate the alternatives.
