I have said it before but cannot stress its importance, beat the bank to reviewing your bank loan (a.k.a. the account review request).
As we move towards the end of the financial year and the prospects of interest rates going up and the economy going down, there is nothing surer than the bank wanting to review most loans with customers.
Gaining a Competitive Edge in Reviewing Your Bank Loan: Proactive Preparation and Strategic Presentation
To secure a significant advantage when reviewing your bank loan, it is crucial for borrowers to gather a comprehensive collection of positive information about their farm or business, including any available photographs. Armed with these materials, borrowers should reach out to their bank relationship manager to schedule a meeting, without explicitly mentioning the purpose. The objective is to present the most compelling representation of their enterprise during the meeting. It is advisable to prioritise up-to-date loan payments, and if feasible, consider making advance payments using any surplus funds.
Building a Stronger Relationship: The Goal of the Meeting
The primary objective of the meeting should be to cultivate and fortify a stronger relationship with the bank relationship manager while actively reviewing your bank loan. The mere act of initiating a meeting demonstrates a proactive approach and instills confidence, as borrowers who are at risk of default typically avoid engaging with the bank. Engaging in a meaningful conversation about the bank's perspective on interest rates for the upcoming year and exploring the possibility of more affordable or suitable loan options is a valuable topic for discussion. However, the core purpose of the interaction is to establish an open dialogue and share any positive information available regarding your farm or business.
Remember, the meeting doesn't need to be lengthy. Some individuals may believe that refraining from contact is preferable if the bank shows no apparent interest. However, based on my experience, this approach only widens the gap between the bank and the borrower, making proactive communication all the more essential.
Navigating Payment Challenges: Seeking Temporary Relief and Maintaining Open Communication for Reviewing Your Bank Loan
Should the borrower be having trouble meeting payments that is the time to put that matter on the table and asked the bank whether there is any way that the bank can extend the terms or make things a bit easier on a temporary basis. If a borrower is asking that sort of thing, they need to have a very good plan as to how they will get the loan back on track within 18 to 24 months.
If you are going to ask for some sort of relief, it is better to ask for a couple of years than a couple of months. Of course, interest will keep on being charged if you get any sort of extension, but you don’t probably want the sort of hardship provision some banks offer which means that you don’t have to make payments for a certain period of time but at the end of that time you have to make up all the payments that were missed. That sort of concession is usually of no use whatsoever unless it’s a case of deferring payments until you have a big stock or grain sale coming up. Whatever it is it’s a good idea to chat with the bank about.
Relationships are the most important thing in banking and now that many local branches have closed it is possible for a borrower to become quite distant from the person who is involved with their relationship. If it is possible to see them, that is the best thing. If that can’t be done it would pay to see whether you can catch up with them on Zoom or Skype or some other form where you can have a video conversation you can see them, and they can see you.
Strategic Farming Decisions
If you happen to have an idea of how your operation will go in the next five years, then it may be worth letting them know about that when reviewing your bank loan. Very often the most profitable thing to do in farming is to keep on each year doing the same thing so that there are no additional costs of a capital nature in need of doing. Once a farm is up and running with decent fencing and yards or grain storage facilities it should be able to operate without much capital expenditure which would mean that it should produce good cash profits that can be taken out of the farm account and put into some form of savings account.
Depending on the individual finance arrangements and circumstances, a borrower might do that even though there was an interest differential between what you paid on your bank loan and what you received on funds deposited. The benefit of that is that you may accumulate enough money some year to completely payout your loan early and get your title deeds back.
Maximise Profitability and Financial Independence
If you just use profits to make extra payments on your loan with the idea of working towards paying out early, you will probably find that as you reduce the debt in relation to the security value the bank will pester you to take out more loans, so that the bank can get a bigger share of the profits you earn on the farm from your blood sweat and tears sunup to sundown. I rather think it’s better to save money and completely payout the debt so that all the profits stick with you .
If existing machinery will do the job stick with it. Resist the urge to update. Otherwise, you again share more of your income with someone else, this time the machinery dealer and finance company.
Building Financial Security for the Future: Prioritising Profits and Protecting Farm Assets
All these matters are really up to the farmer involved and what they have planned. It is important if one intends to stay on the farm for a long time and perhaps pass it on, to make sure that it is earning profits every year and at least a reasonable proportion of those profits is put aside in another bank account so that it cannot be spent on the farm. The point of running a farm is to make a profit out of it as well as enjoying the farm lifestyle. Putting money aside in a separate bank account forces the farm to make money and give it to the farmer.
Farms are like gigantic sponges, and they will absorb absolutely any amount of money a farmer wants to spend on them. It is that sponge like characteristic of a farm, that is very difficult to be extracted, that frequently gets the farmer into devastating debts. So, when you visit the bank, don’t get conned into expanding your loan because they tell you how easy and advantageous it is to increasing your loan. What the bank is interested in is a profit it is going to deliver to the bank.
Should you want a hand to prepare a good looking package of information to take to them, you can contact GBAC. We will be only too happy to help you put that together.
Article by Greg Bloomfield Ret, FCA, CPA, ACIS, FICD. Retired sheep and cattle breeder. Succession planner.