When turmoil occurred in the financial sector early this fall, chances are the first thing on your mind was your own money. Were your investments safe? Was your lender on solid ground? Would your lender have the capacity to meet your financing needs next year?
As a customer and a part-owner of a Farm Credit lending cooperative, you should know that, unlike many institutions that are in trouble today, Farm Credit remains financially solid. The Tenth Farm Credit District’s credit standards have been conservative over the years; therefore credit quality is strong. Farm Credit continues to be a competitive and dependable source of credit for qualified borrowers who have well-managed operations.
Nevertheless, the resulting credit crunch is affecting most sectors across the country. During times of tight credit, lenders and borrowers alike must exercise caution, conservatism and prudence. In the case of a financing cooperative, this approach will ultimately benefit all customers.
What to Expect From Your Lender
When financial conditions are unsettled, prudent lenders will be more cautious. Here’s what customers can expect from their lenders in these times:
Frequent contact with customers
Loan officers will keep in touch with their larger customers and those who are most likely to experience difficulties. If a problem does arise with a loan, the lender will be able to intervene early and work with the customer to help resolve the problem while there are still multiple solutions.
Ongoing assessment of large and high-risk loans
The lender will be proactive in assessing the condition of large loans. This will include examining the borrower’s current financial situation, capital, assets, liabilities and cash flow.
Tighter underwriting standards
The lender will verify that their current underwriting standards are still valid in the evolving marketplace. After examining such factors as credit-scoring models, the level of advance rates and pricing of loan products, the lender may have to consider increasing underwriting standards.
Stricter loan covenants
The lender may require additional or stricter loan covenants in order to reduce the risk for both parties, thereby ensuring the continued financial health of the borrower. Loan covenants are those conditions with which the borrower must comply in order to meet the terms of the loan agreement. Examples are maintaining a certain level of insurance or meeting a specific minimum liquidity level in order to cover short-term debt.
Thorough credit examination of new applicants
Lenders will carefully scrutinize new borrowers’ creditworthiness through careful verification of the borrower’s current financial condition, including such factors as cash reserves. Loan applicants may be required to provide “fresh” information that proves their capacity to repay the loan.
Shorter loan maturities
Long-term loans carry more funding risk than short-term loans, because long-term funds are costlier to the lender during times of uncertainty. Lenders will reduce their risk by offering shorter loan maturities, possibly at lower interest rates.
More thorough credit analysis
Lenders will require more information on which to base their credit decisions, especially for large and complex loans. Capital investments, for instance, will require more detailed justification and analysis.
What the Lender Expects From the Borrower
The lending relationship is a two-way street. When credit is tight, the competition for loans means prudent borrowers may have to change their behavior and their expectations. Whether you have an existing loan or plan to renew, here’s what your lender may expect:
Keep your lender informed
Stay in contact with your lender, especially if there is any possibility of difficulties with the loan. Provide updated financial and cash-flow projections that incorporate the most current market events and yield forecasts. Keep your lender updated on crop and weather conditions. Remember: Bankers are accustomed to risk, but they don’t like surprises.
Take corrective action if necessary
Take steps to maintain enough liquidity in order to operate through a down cycle. Being proactive and adjusting your risk level, in consultation with your lender, should help to get you through most economic tough times.
Be prepared for increased scrutiny
Expect a higher level of scrutiny from the lender, regardless of your credit history. The lender’s ability to help you is directly related to how much he or she knows about your operation.
Prepare well for loan renewals
Prior to renewing a loan, prepare a thorough and detailed projection for the coming years. The credit market has changed, so be realistic in your expectations.
Right-size your operation and focus on core operations
This may not be the time to expand or to maintain an operation that is not cash-flowing. If the payments on prior capital investments are draining income, cut back. Do what you do best and most profitably.