Involve the lender sooner, not later Part 3
Considerations for the farm business after prevent plant and delayed planting.
The severe weather this year has put a tremendous amount of pressure on Michigan farms. From delays in planting to spraying timely for weeds or diseases, each farm has felt the impact of these conditions. https://www.canr.msu.edu/agriculture/delayed-planting-resources/ The common thought is that because conditions across the state were similar that the impacts to farms would be, too. The reality is that each farm is a very different situation.
At the end of the season, what does your farm’s situation mean when it comes to profitability and cash flow? In this segment, MSU Extension recommends the following considerations:
- Involve the Lender sooner, not later when need or considering adjusting financing.
- Consider potential tax concerns and strategies to work through them.
Involve the Lender sooner, not later when considering a plan for the year
Meeting with the lender is a crucial part of working through a challenging year and it is important to make that appointment as soon as possible. Lenders are more willing to work with you going in ahead of time versus waiting six months until the end of the year. This allows them to fully understand the financial condition your farm is in, prioritize their involvement in that process, and help find a positive solution.
It is also important that you lead the discussion of what solutions are needed for the farm. As the decision maker, you want to discuss the plan for your operation to continue moving forward; not just the problems of the season. The lender can offer recommendations to fine-tune your plan and even offer alternative solutions for you to consider, but you do not want them making any decisions for your operation. They do not have all of the information about the farm that you do and do not have to live with the consequences of a poorly thought out plan. Remember, manage your own business, and do not let the lender manage it for you.
In order for a lender to help the farm find a solution, they are going to need specific information. The first piece of information they are going to need is a balance sheet displaying the farm’s current financial situation or Equity. A balance sheet is a financial snapshot in time. It shows what you think the market value of your assets are worth on that date. Keep in mind that values should reflect the true sale value of those assets, not necessarily the value you think it should be worth. Be sure to include any unpaid bills that are currently outstanding on the balance sheet and bills you anticipate needing to pay for the remainder of the year (i.e. seed bill, real estate taxes).
What about determining a value on a growing crop in August? There are a couple options to consider. The first option is to value them based solely on the cost of inputs. For corn being grown, there is fertilizer, seed, chemicals, fuel, and possibly repairs or custom application associated with the crop. Add the costs of these inputs together offers a value for the growing crop. The second option is to use crop insurance values as determined by yield or revenue protection policies. Be sure to discount these values by the costs yet to be incurred (i.e. harvest costs) to keep the values within a reasonable level.
Another document the lender will need is a cash flow projection. This is a realistic expectation of revenues minus cash expenses. The lender needs to see how and when loan payments will be made. Generally, if the season is “normal” the projection should show enough income to pay for expenses (profitability) and debt repayments (cash flow). A word of caution. Be careful about being too optimistic or overconfident in developing a cash flow projection. The yields or production outputs should be conservative. Typically, they would be based on proven historical performance, but those yields may or may not be achievable in a challenging year. Any overstated numbers or production values could reflect poorly on your understanding of the farm’s financial condition. If the information used is unrealistic, the lender will question your ability as a decision maker and if your loan request is worth pursuing.