This year has been anything but conventional, and the lending environment is trending the same. We are seeing decades-high inflation and interest rates as high as 5-7%. With smaller margins this 2022 crop year, there will likely be more ag operations planning to work with lenders and other business partners this season. This makes it critical for borrowers to focus on best practices for a smooth and successful loan renewal process.
Kala Jenkins, Pinion agriculture strategic advisor, has worked closely with many ag operations, including their lenders and other business partners, to position them for both survival and success. She has seen what works and what doesn’t. Here are her top recommendations for improving the loan renewal process this year:
1. Communicate. Communicate. Communicate.
“I like to call this the ‘three-legged stool of lending’ because it is truly that imperative to prioritize communication with each person you are working with,” says Jenkins. Being collaborative, responsive, and personable with your lender all year – not just during renewal – will set you apart and create a better experience as you work together. This will positively impact every other aspect of the process.
2. Give yourself time.
There is usually a big difference between the amount of time you think loan renewal will take and the time it ends up taking. With more ag operations seeking assistance, lenders may see a backlog of applications, extending the process from the typical 30-90 days to possibly twice that long. So, it’s critical to get started early and give yourself and your lender breathing room.
3. Provide your lender with accurate and adequate information.
This year, lenders are asking for more information for crops, budgets, and analysis. You may even see requests for joint grain checks and joint crop insurance checks. The more information and hard data you can provide, the better. Prioritize three key items: an overview of your business for the past year, a balance sheet with fair market value for land, inventory and equipment, and a breakdown of your monthly income and expenses. “A breakdown of expenses helps your lender know when a readjustment in your repayment plan might be needed to fit your cash flow,” says Jenkins.
4. Make the connections.
Collaboration between your lender, accountant, crop insurance agent and marketing adviser can lead to less risk and better returns. They each know your business from a different angle and depth, so joining their resources and knowledge could help you and your lender make better decisions. Make the introductions for your lender.
5. Explore alternative lending options.
The best decisions are rarely made when you feel backed into a corner. Over the past few years, several alternative lenders have emerged as a source of capital for agriculture producers. It is beneficial to research your options, while understanding that not every lender will be the right fit for your needs. Jenkins advises, “Whether traditional or alternative – make sure that your lender is the right size for your business and that it aligns with your needs and values as a farming operation.”
A word of caution as you pursue loans this year: As lenders seek to secure their lines of credit, they will likely reach out for more collateral. If this is something you experience, be sure to communicate with your advisor so you don’t get overextended or create a problem that will snowball. The way that operating loans are secured can directly affect FSA program eligibility.
Though the lending environment is shifting and more challenging to navigate, loan renewal doesn’t have to be overwhelming. These five steps can set you up for success as you begin your renewal process.
Contact a Pinion expert for help with preparing for the process, strengthening your borrowing position, or for information on alternative lending avenues.