Banking the farm - a financial confession

Take home messages

• The borrower must not take a laissez faire approach to banking, they must undertake their own due diligence to determine where they sit in the value chain of banking.
• If you understand your credit rating you have the opportunity to negotiate the cost of debt.

Introduction

There is around $67 billion currently lent to farmers around Australia. Every day our farmers are banking on the banks continued support. The banks conduct annual reviews to test the viability of each of their agribusinesses. If the client passes the credit performance check, it’s business as usual. If they fail, then it’s time to work out a solution or loan recall.

But how does a borrower determine if a bank’s appetite for lending is changing?

The answer is that most agribusiness borrowers don’t test the banks appetite. Their funding then becomes a blind spot for a financial grenade to explode without apparent warning. In these instances, the borrower has not created a mechanism within their business model to provide visibility as to the bank’s willingness to lend to their business, and under what guidelines.

For farmers who borrow, it is almost a laissez faire playground where both parties are agreeing to terms, with one party having full visibility but the other doesn’t.

Under these trading terms it is of no surprise that we continually get asked by farmers:

• Which is the best bank to bank with?
• Which banks are lending to agriculture?
• What is their appetite to lending?
• Is it getting tougher out there?
• Why are the banks taking so long to make decisions? Is there something wrong with our business?

The bank’s internal review mechanisms are not communicated to the borrowers and are not designed for public knowledge.  It is in the bank’s best interest to keep a positive perception in the open market of their capability to lend, while behind the scenes they reconfigure their balance sheet lending to meet their own internal requirements and targets. This perception is called marketing, and they are very good at it.

What does this mean for the borrower?

The borrower must be accountable to undertake their own due diligence to determine where they sit in the value chain of banking. At face value, this would be deemed an improbable task due to both the time and skill required to obtain such an insight and understanding.

Understanding your credit rating removes the ‘blind spot’ of funding risk. Having knowledge of the bankability of your business and knowing what the borrowing thresholds are, allows you to make viable strategic decisions.

Understanding your credit rating also creates the opportunity to negotiate the cost of debt (i.e. interest rates and fees). With a lower cost of debt and with access to debt on more flexible terms, gross margins and net profit in the business improve.

Timing

Seek advice if required, but timing is an essential characteristic. Layered with timing, is the ‘art of presentation’. Knowing how to present an enterprise with so many unforeseen ‘risk’ variables inherent within agribusiness is critical to satisfying a bank’s credit policy. Accidental or deliberate misrepresentation of any business to the financiers is at the peril of the business. However, by applying some true and tested principles of good corporate governance, the reward is profound for those that apply and adhere to the rules of engagement.

Banking is not static. Banking is not set and forget. The banks are continually evolving their exposure and appetite, and businesses by their very nature are forever evolving.

Contact details

Brad Sewell
Director – Agribusiness Finance
Robinswon Sewell Partners
0427 390 016
brad@robinsonsewell.com.au
www.robinsonsewell.com.au