Money Tips from our First Boot Camp: Part Two

This Business of Farming

How lenders think about collateral and working capital

Published on: February 26, 2014

We had lots of questions asked and answered at last week's Ag Finance Boot Camp, held in St. Louis with help from our friends at John Deere, Farm Credit and the Farm Financial Standards Council.

A good crowd of (mostly) farmers and spouses were looking to learn more about the dollars and cents of their business. Continuing the theme from part one of this series, here's a few more nuggets:

Eric Edwards, senior vice president at NBH Agribusiness Banking Group, Denver, Colo., talked about the four Cs of ag lending: Capital, Capacity, Character and Conditions. "Of these, character is most important," he says.

"Bankers get really nervous when the collateral backstopping your loan gets less valuable than what youre borrowing from them," says Eric Edwards, NBH Bank.
"Bankers get really nervous when the collateral backstopping your loan gets less valuable than what you're borrowing from them," says Eric Edwards, NBH Bank.

Add in working capital, too. It's critical when commodity prices and input costs experience significant volatility. Balance sheet liquidity is generally derived from Cash, Accounts Receivables, Crop Inventory, and Feed Inventory.

Lenders prefer a Current Ratio (Current Assets/Current Liabilities) of at or above 1.20X.

As land values become volatile, think about how your banker sees your loan collateral. Falling values make for anxious lenders. They may love and admire you, but they also have regulators they must answer to.

Teresa Garside, with John Deere Financial, says leasing reduces upfront equipment costs compared to ownership.
Teresa Garside, with John Deere Financial, says leasing reduces upfront equipment costs compared to ownership.

"Bankers get really nervous when the collateral backstopping your loan gets less valuable than what you're borrowing from them," says Edwards.

If you want to strengthen your position with the bank, be transparent – even when you're in trouble.

"The best way to make your banker love you is to tell them when you're making decisions and why, and they'll find ways to support you over time," he says.

How can you improve working capital? Here are six ideas:

*Set aside cash for a rainy day

*Protect the value of current assets through risk mitigation

*Invest in current assets

*Convert non-current assets into current assets

*Restructure current debt to non-current

*Don’t pay non-current debt early

Leasing is getting more attention as a viable way to build both working capital and cash flow says Teresa Garside, Director of Market Development for Ag and Turf at John Deere Financial.

"If you're becoming more cost conscience, often times a lease structure will be more cost effective over purchase or installment note," she says.

Why? It's not just expensing the payments; it's also the upfront costs. A lease will require an advance payment, but in most cases it will be less than a down payment on a purchase. Thus, if you have lower payments you improve cash flow, building more capital if expansion opportunities come along.

Likewise, an equipment lease lowers that expansion risk if the added acreage is rented. With an equipment lease you can manage those additional acres in tandem and not risk making a major equipment purchase that could wind up under-utilized if those acres go away next year.