This is a question many people are asking. I believe it’s something we need to be looking at regularly. As far as when you should fix them, that depends on many factors.

*    Are you planning to stay with your current lender?

Are there any Prepayment Penalties? They have committed to investors to pay a fixed rate on their funds. Thus, you will likewise be committed to the bank.

*    Will you be increasing your loan amounts soon?

Be certain that this doesn’t impact your rates. Often, they’ll set up fixed rates on portions of your loan at various maturities.

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Wow! Wasn’t 2009 a real tragedy in terms of overall cash flow and bottom line results? It was absolutely pathetic for most producers. Since then dairymen have been enjoying the fruits of higher milk prices. How can we avoid revealing the same calamities again? What could you have done differently as a manager? These are critical items to spend some time on.

The world of finance continues to amaze me. Recently, I had two clients whose banks decided that, in their opinions, they can no longer survive.

Well, well, isn’t that interesting…I don’t want to rain on anyone’s parade, but they had already survived! We had been in the process of rebuilding their working capital and positioning them for a better outcome during any future downturn. Learn from the past, and see what needs to be changed. For those items not optimal, let’s adjust our course so we achieve better results going forward.

I’ll give you an excellent example that had recently happened with one of my clients. We approached the bank with the possibility of refinancing their real estate and moving some short term debt onto their real estate. This is not that unusual of an approach to restructuring someone’s debt load. Nonetheless, it was an excellent example of how something as simple as a debt restructure can turn an operation around. This client achieved a positive monthly cash flow within 2 months! As you can imagine, they moved forward in a very positive manner when milk prices climbed. The lesson here was that if their lender had dwelled in the past, they would still be struggling with their cash flow today.

What can we do to position ourselves for a better future? First, here are a few things not to do:

1. The worst strategy is whining. Whining is rarely a successful response, so stay proactive in managing your operation.
2. Do not, under any circumstances, burn any bridges. Successful businesses are built upon RELATIONSHIPS. Develop them and guard them closely.
3. Don’t attempt to “spend your way out of a business slump.” Analyze your capital expenditures and operating expenses.

Here are some items you should do for your business:

1. Be proactive. Study your business and make smart decisions. Consult with your lender.
2. Utilize your professionals wisely, and seek advice from the right people.
3. Are you having your Accountant prepare regular accrual financial statements? If not, you are missing one of the best tools available to your dairy operation. They will also assist greatly in obtaining the financing you need.
4. Take a close look at developing a marketing plan for your milk. Look closely at Put Options to place a floor under your future milk prices.
5. Finally, develop a plan. This should be a guideline that includes each of the previously mentioned items.

Develop your plan and include your lender in it. Then, you won’t be asking yourself where all the lenders have gone. They will be knocking on your door.

One of the most common problems faced by many businesses today revolves around their ability to obtain financing they need. This challenge becomes even more pronounced when we are faced with a tight lending environment. This has been compounded by the Sub Prime Mortgage mess and its related financial issues! This certainly magnifies the importance of maintaining a solid banking relationship.

Whenever one of my clients or a prospective client I am working with gets turned down on a loan proposal, it is imperative that we review the facts and explore “why?”

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Oh, how the times have changed – Let’s face it. The days of the “handshake equals dairy loan” are long gone! Actually, it’s been that way for 25 years. I find it remarkable that some people think that “Old Bob” down at the bank still exists. They simply told Bob what they needed, shook hands and signed one sheet of paper before achieving access to unlimited loan amounts. At least that is how they remember the process. Was it truly that simple? I don’t know because I wasn’t there. What has changed? Here is a list of items that come to mind for me:

1)      The savings and loan debacle of the 1980’s changed forever how banks were required to document and monitor loans.

2)      The resulting sale of many assets, for just pennies on the dollar greatly increased the level of outside auditor scrutiny.

3)      In turn, this boosted the amount of “internal auditing” that banks do to prepare for these outside auditors.

4)      So, when your loan officer calls and asks for an item, don’t think they are being a problem. He is simply attempting to keep you out of the “problem loan” category.

5)      We are being introduced to what seems like excessive documentation. Have you seen a set of loan documents lately? Most of them could be used to anchor a small boat. What can you do in response?

1. When you meet with your loan officer to complete your annual loan renewals or to request new funds for a project, show up with more than just your tax returns. How about a specific financial plan stating where you plan to take your business during the next 12 months or five years?
2. Provide them with solid Certified Public Accountant (CPA) reviewed financial statements. These are an investment in the future of your business. I recently had a client who seemed surprised that his bank was requiring him to acquire CPA-reviewed financial statements as part of his loan approval process. He is claiming amnesia, but I assure you that I forewarned him that this was coming back in 2002. His business and its related borrowing needs were growing. Thus, as for any borrower, his reporting requirements had increased as well.
3. Provide the bank with a projection of the next 12 months’ cash flows for your operation. Give them a fair market value balance sheet, detailed inventory report of your herd, feed inventory, and investment in crops.

This reporting provides you and your banker with a clear picture of your current loans, and where you plan to take your business. The client I mentioned was right. This did represent a big change for him. However, General Eric Shinseki, chief of staff for the U.S. Army summed it up well. “If you don’t like change, you’re going to like irrelevance even less!” That’s true for our industry, too. Make your necessary changes today!

One of the most common problems faced by many business people today revolves around their ability to obtain the financing they need. This challenge becomes even more pronounced when we are faced with a tight lending environment. It also shows the importance of maintaining a solid relationship with your lender.
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