Choosing a knowledgeable ag lender is crucial for any farmer or rancher. Irv Bard, who works for Farm Credit Services of America, emphasizes the importance of working with an established ag lender who understands the intricacies of the agriculture industry.
Want to learn more about lending, borrowing, and business? Keep reading to find out!
Choosing your Ag Lender
Irv suggests that finding a lender who specializes in agriculture and ranching can make the borrowing process more effective and beneficial in the long run.
Irv has two rules when it comes to conversations with a lender. The first rule is to make sure that the lender is an established ag lender. This means finding someone who has experience and knowledge specifically in the agricultural field. The second rule is to refer back to the first rule, emphasizing the importance of working with a lender who understands the unique challenges and needs of farmers and ranchers.
The agriculture industry is constantly evolving and changing, and it is important to be connected with a lender who is up to date with these changes. While there used to be many community ag banks that were strong ag lenders, the landscape has shifted, and some banks are no longer focused on agriculture. Therefore, it is essential to find a lender who is dedicated to agriculture and understands the industry's complexities.
Irv also knows the significance of the lender's expertise and experience during challenging times. When the market takes a turn for the worst, having a strong relationship with a knowledgeable lender can help navigate unexpected situations. The lender's understanding of the industry can provide valuable insights and guidance to borrowers, helping them overcome difficulties and work together towards finding solutions.
In terms of borrowing needs, Irv breaks it down into three categories: equipment or titled vehicles, real estate, and operating. For equipment or titled vehicles, he suggests keeping it simple and recommends utilizing ag direct dealers or credit unions. These transactions are often straightforward and do not require extensive expertise.
However, when it comes to real estate or operating needs, Irv emphasizes the importance of ag expertise. Some lenders may only dip their toes into agriculture when conditions are favorable, but it is crucial to work with a lender who is consistently knowledgeable and committed to the industry. This ensures that borrowers receive the necessary support and guidance specific to their agricultural operations.
Irv also encourages borrowers to look beyond just the interest rate when choosing a lender. While rate is important, it is equally essential to consider the value that the lender adds to the operation. This includes their expertise, understanding of the ag industry, and ability to structure loans in a way that benefits the borrower. A good lender goes beyond offering the best rate and instead focuses on providing comprehensive support and adding value to the borrower's operation.
Lenders provide valuable expertise and guidance
Lenders provide valuable expertise and guidance to farmers and ranchers in the agricultural industry.
One of the key points is the value of a lender who understands how to use the tools available and how to safely leverage them in the borrower's operation. Leverage adds risk to an already risky situation, and managing this risk is a crucial part of the conversation between the borrower and the lender. A knowledgeable lender can provide insights and strategies to help borrowers navigate this risk and make informed decisions.
Lenders, such as Farm Credit, have expertise in the agricultural industry and can share their knowledge with borrowers. They can provide consumer education on various topics, such as different types of loan products and their implications. By educating borrowers, lenders empower them to make informed choices and optimize their borrowing decisions.
Experienced Ag lenders can see potential issues and pitfalls that may not be apparent to regular commercial lenders. They can provide valuable insights and recommendations based on their past experiences, helping borrowers avoid mistakes and improve their chances of success.
There is an importance of open communication between borrowers and lenders. Irv encourages borrowers to ask questions and be transparent with their lenders. By doing so, borrowers can receive the best possible guidance and support. This open communication also allows lenders to understand the borrowers' goals, challenges, and aspirations, enabling them to tailor their advice and recommendations accordingly.
A Market-based balance sheet is critical
One key aspect that farmers and ranchers should consider when working with an ag lender is the importance of a market-based balance sheet. This is a critical tool that provides a realistic and accurate representation of the value of assets and liabilities within an agricultural operation.
A market-based balance sheet differs from a tax-prepared balance sheet in that it takes into account the current market value of assets, rather than relying solely on depreciated values. While a tax-prepared balance sheet may show a lower net worth due to depreciation, a market-based balance sheet provides a more accurate reflection of the true value of assets.
For example, a tax-prepared balance sheet may show a net worth of $2 million, while a market-based balance sheet could show a net worth of $12 million. This significant difference is due to the fact that a market-based balance sheet considers the market value of livestock, inventories, and other assets that may not be reflected in a tax-prepared balance sheet.
Having a market-based balance sheet is important for several reasons. It provides a more accurate picture of the financial health and value of the agricultural operation. This information is crucial for making informed decisions about borrowing, investing, and planning for the future.
A market-based balance sheet also helps to ensure that the operation is not undervalued or misrepresented. By accurately reflecting the value of assets, farmers and ranchers can avoid situations where their operation appears to be bleeding cash or making less money than it actually is. This can be particularly important when seeking financing or working with potential investors.
Different operations, different financial decisions.
Different operations in the farming and ranching industry require different financial decisions. For example, the first operation involves a man who sells a couple of cows and a few bulls. There is nothing wrong with this approach, as it is a common practice in the industry. However, the second operation is more complex and involves buying heifers, adding value to them, and selling them as bred cows. This operation focuses on retaining and improving the quality of the cows, ultimately selling them at a higher value.
These two operations may have similar financials in terms of balance sheets and profit and loss statements, but they have a different structure and approach. Understanding the nuances of each operation is crucial for making informed financial decisions. This is where the experienced ag lender comes in. By capturing the details and context of the operation, lenders can better understand the unique aspects and complexities of the business.
This helps lenders determine the appropriate financing options for the operation. For example, in the first operation, where cows are sold regularly, short-term financing options may be more suitable. On the other hand, in the second operation, where heifers are bought and turned into bred cows, a combination of short-term and intermediate-term financing may be necessary. The narrative provides insights into the timeline and needs of the operation, allowing lenders to structure the financing accordingly.
For more tips on lending and ranching head over to listen to our podcast episode where we talk to Irv about all things lending for your business.
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