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9 things your banker doesn’t want to hear – Part 1

Progressive Forage Editor Lynn Jaynes Published on 05 June 2018
farmer and banker fighting over piggy bank

Financing a farm or ranch is usually stressful – no matter on which side of the banker’s desk you sit.

Earlier this year, ag economists noted shrinking commodity prices and the lowest ag incomes since the recession – all in the midst of a trade war with China. And now the Federal Reserve is ending a prolonged period of low interest rates, and as a result, banks pushed the fixed rate on farm loans to a five-year high of 5.6 percent.

So, not surprisingly, financial stress is increasing. The quotes below, while cited “tongue in cheek,” present scenarios that are all too real to the loan acquisition process and can be instructive to improve farmer-banker relationships:

The farmer/rancher says, ‘My plan is to pray really hard for rain’

Natural disasters happen – flood, fire, blizzard, disease, drought, insects. Sometimes you even feel lucky if you only had one natural disaster in a year’s time. The USDA Farm Service Agency has programs to help farmers who are recuperating from natural disasters. There are specific requirements to obtaining these funds, regarding insurance and filing operating plans, etc., so it’s a great idea to check these out before the disaster happens – not because you’re a pessimist, but because you want to be prepared.

Private insurance can also help when your ability to generate revenue tanks, under specific claim qualifications. Again, it’s something to delve into before the claim is needed, so you know where you stand and what you’re paying for and can expect to receive.

Just think of it this way: You wouldn’t drive a car without carrying a spare tire and a jack – insurance and government protection plans work the same way. Consider it.

The farmer/rancher says, ‘I’ll just pay my employees under the table to save on taxes’

Please tell me you aren’t doing this. There are so many problems associated with this practice that I can’t begin to cover it adequately in one article. While it’s not illegal to pay in cash, it’s not a good business practice either. Even if you pay employees in cash, you’re still responsible for federal and state income tax, FICA, unemployment taxes and state workers’ compensation fund payments.

But, you tell yourself, if no one knows, what’s the harm? (We’ll save a discussion on “integrity” for another time.) Here is a hard fact: An employee “not on the books” gets hurt and the doctor asks if he or she was hurt on the job. If the employee answers affirmatively, they’re covered under workers’ compensation. But wait, you haven’t paid workers’ compensation insurance because you paid the employee in cash. Hence, you can literally “lose the farm.”

Consider another scenario: You fire an employee “not on the books” and they file for unemployment. But wait, you haven’t paid into the state disability and unemployment fund. Then it’s a done deal – an auditor will be knocking at your door.

The farmer/rancher says, ‘I only need a loan until this weekend’s lottery’

Farming is seasonal, and there will be slow revenue-generating periods, but your contingency plans should be in place before the crisis happens (and the lottery isn’t a contingency plan and neither is inheritance based on a rich uncle dying, in case you were wondering). Farming is also volatile and is at the mercy of consumer hysteria and misinformation, commodity price fluctuations and global trade issues. These unpredictable market fluctuations should be taken into account when you set up your loan. It’s impossible to protect yourself from every eventuality, but using spending moderation during the good years helps, and so does a well-planned loan, to weather down years.

The farmer/rancher says, ‘What, I’m overdrawn? I thought you would just bounce that check instead of paying it’

Forage production takes more than seeds and dirt, and your overdrawn account is not a financing plan in lieu of loans. If you don’t know that a check will overdraw your account, how do you expect the banker to have confidence in your management? If you won’t be generating any cash until harvest, plan your loan payout accordingly. There are plenty of loan options to cover contingencies, but none cover poor planning.

The farmer/rancher says, ‘What do you mean by ‘balance’ sheet?’

A balance sheet is a list of assets and liabilities. Without it, every piece of used equipment at the farm sale can look like a good deal. The balance sheet keeps your perspective balanced (as well as your dollars).

Any operation takes specialized equipment, and the cost of that equipment is often underestimated. Before you write the check for that “can’t-pass-up deal,” thoroughly research the costs and options, including operating costs (fuel), maintenance and repair. And make sure you have the income to be able to handle the payments. A can’t-pass-up deal might be the very deal you need to pass up.

Now, I know I promised you nine things your banker doesn’t want to hear, and there are only five in this article. But I didn’t promise they would all be contained in one article (your attention span is about used up for one article – so the research says), so I’ve put the rest into “part 2.” If you absolutely can’t wait for the remainder of the list, you can find it here.  end mark

Lynn Jaynes
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PHOTO: Illustration by Kristen Phillips, based on a Getty Images photo.