A Letter to my Banker – A Guide for What you Should Expect from Your Lenders

Farmer 1 – We go to our banker to ask for money.

Farmer 2 – We give the banker the opportunity for our business.


All lending institutions are not created equal; and no lending institutions should ever take your business for granted. Once you, as an entrepreneur, can get these two ideas ingrained in your management, your business will be better off for it.


When I began life as a financial consultant, I did not realize how much of my time would be allocated to financial institution management. Not going to lie, I made up this term, but it has described my past few years in business. 


It got to the point where accounting firms would utilize our business to shop lenders for clients, because they did not want to hurt relationships with the banks. I personally find it a fair game. We provide the same opportunity to multiple banks to compete – bring your A game.


I wanted to discuss this topic because of some recent conversations I’ve had in the industry. Whether it be new entrants into the banking industry, or old veterans that are looking to solidify additional business, we hear the same rhetoric time and time again. 


The financial institutions say “We are different, we care about relationships, we can offer things that nobody else is doing…” 


To be fair, I understand the sales and relationship pitch. But on the other hand, none of them are doing anything different. And relationship management is something that is expected, not an extra.


So, in an open letter to the bankers, here are the key things progressive producers now expect from your organizations:


Client Relationships 2.0


The days of just picking up the phone are dead and gone (although from experience I now find a large percentage of our industry can’t even accomplish this in a timely fashion). The expectation of many farms is that if you are an “advisor” on our team, you better start bringing solutions to the table. 


One of our core values at the Hebert Group is to have win-win collaborations and relationships. That means, if you’re our lending institution, we’ll expect you to provide us real time solutions. To many operations this may be foreign; historically the banking relationship has been money in and money out. 


Agriculture today calls for better banking solutions. Whether it be in the form of operating credit, interest rate terms, investment or swap mechanisms, or many other banking items, there are a multitude of planning and management tools available. In our eyes the key differentiator between lenders will be which ones can suggest solutions available to make our business, or our lives, better. 


Has your bank approached you to suggest releasing some security, or getting personal guarantees off a loan that are not required? Our bank has, and this is the reason we continue the relationship.


Liquidity and Cash-Flow Resources


I am going to be direct on this one; if you have land securing any type of operating credit for day-to-day activities, you need to stop. 


I understand this philosophy on loans with non-banking institutions (Farm Credit Canada, etc.), but if your main bank is keeping land security on your operating credit, you are being done a disservice. Most of our clients are highly progressive and they want to open as many opportunities as possible moving forward. Because of this, freeing up land and using your inventory, receivables, and prepaids to backstop your operating credit at the bank is a must.


The historical goal for many operations was to be debt free, but that was never our goal. Why?. As an organization, we’re utilizing the financial institutions in a way that promotes our returns being higher than our interest. For that reason, we want to free up and use as much security in the operation as we can. We want to utilize inventories to cover operating credit, buildings to cover building loans, equipment to cover equipment loans, and land to cover land or other investment expansions. This is the way you can effectively utilize your entire equity pot to take advantage of growth or other opportunities.


Lastly, if you are a farm that does not “utilize” operating credit, you should still consider having the line available. Whether it be years like the past few where you wanted to purchase inputs early, or hold inventories later, you have the ability. Also, have you ever had an opportunity come to your kitchen table, and then had to phone the bank before taking it. With operating credit in place, you may win a land deal as you can sign the cheque, or the deposit, the moment you know the number. It’s a strong bargaining chip to have, and for that I would implore farms to have additional cash flow available.


Ability to Change or Adapt


This is the last request I have for your bank; please have the ability to treat every farm differently and have lending tools that can adapt. As land prices and interest rates have continued to rise in unison, the primary producer landscape needs new ways to finance without hurting profitability or cash-flow. 


A decade ago, the “interest-rate swap” was a tool that was foreign to agriculture. Used in many other leveraged industries, but never thought of as a mechanism for farms. This has changed significantly over the last few years. In fact, a large percentage of our consulting business has built their interest rate management plans based on the use of interest-rate swaps or banker’s acceptances. 


Other tools being employed are interest-only terms or longer amortization. Again, if your goal is to be debt free these are not the resources for you. However, if your goal is to continue growth in this new higher cost and higher risk environment, these are must. 


With appreciation in land and many other factors remaining consistent, the ability to lower payments by going interest-only or longer terms is a strong way to not slow down the growth curve. The only question you need to ask yourself is whether you ever care if you pay off the original land debt? Appreciation of 15% per year some years, versus interest rates of 5-6% right now. A real estate question versus a farming question.


In the end, I believe the true measure of a bank’s worth is its complacency. In many ways I lump accounting firms and banks into the same unit of measure. I call it the “what have you done for me lately measure”. If you can’t answer that within the second you read it, maybe you also need to send a letter to your banker.