The Sixth “C” That Ensures Financial Success

In light of continued low grain prices, your lender becomes an even more important partner for your operation. ( AgWeb )

In light of continued low grain prices, your lender becomes an even more important partner for your operation. How can you ensure you will receive their stamp of approval? The first step is to understand how they measure you and your operation. 

“Lenders use the 5 C’s of credit to decide if you’re a good credit risk,” says Linda Keith, a CPA from Olympia, Wash.

Those factors include: 

  1. Character—Does the borrower have a history of repaying his debts and possess the experience and managerial ability to have a reasonable chance of success?
  2. Capacity—Does the borrower have the resources to repay?
  3. Collateral—Does the borrower have property or large assets that can be used to secure the loan?
  4. Conditions—What are the current conditions in the industry? Is the borrower in the financial position to weather the storm if conditions are not ideal?
  5. Capital—How much does the producer have invested in the operation? 

“I would like to add another ‘C’—communication,” says Keith, who trains lenders on how to make smart loans.

In today’s tough ag economy, farmers need to maximize their relationships with their lenders. 

“It goes both ways,” Keith says. “I train lenders to ask borrowers good questions. But wouldn’t it be wonderful if you, as the borrower, did that too?”

Ask your lender questions such as:

  • What works well on other farm operations?
  • What financial metrics to you watch the closest?
  • How frequently are you reviewing my financials?

“I don’t view the lender as someone you are coming to, hat in hand, to try and get money—instead you want a mutually beneficial relationship,” Keith says. “You are bringing them business, but they also bring value to you, in terms of the things they know.”

When you visit your lender, be prepared, advises Chris Barron, director of operations and president of Carson and Barron Farms in Rowley, Iowa.

The basic information your lender needs, includes a clean set of cash-accounting documents and personal balance sheets, along with business and personal tax returns. 

“Additionally, an accrual-based set of books with accurate inventories will soon be a basic requirement,” says Barron, also a financial consultant for Ag View Solutions and a Top Producer columnist. “Ensure you have an accurate balance sheet with consistent year-over-year values assigned to large assets such as land, equipment and infrastructure.” 

Ask what additional information your lender would like to see, Barron suggests. That could include written business, operational or marketing plans. 

“Once you have a clear understanding of the lender’s expectations, you’ll better understand where you’ve been, where you’re at and where you need to be, moving forward,” he says. “Communication is the single most important aspect of your relationship with your lender during difficult times.”


Read More:

Loop in Lenders: Open communication creates trust and adequate funding.

Optimize Your Lender Connection: Use these action items to guide conversations with your lender to communicate information that will help you maintain healthy finances. 

What to Communicate to Your Banker Now: A farmer going dark on his or her banker is the first warning sign of trouble to come.