Covering your bases with the bank

Debt is part of operating most businesses. Its effective use is important in creating wealth over the long term. However, the past few years have created difficult debt management conditions and, although borrowed capital is a fact of life, debt loads have increased beyond desirable levels for many dairy farmers – which has increased finance costs, affected cash flow and caused a drop in the net wealth of many people.

As the financial manager of your business, the questions you need to ask are: 

• Is my level of debt a problem to the long-term survival of my business?
• Can my level of debt be better managed to improve my financial security?

To answer these questions, you should meet with your lender so you can work together to create a viable solution for your situation. It’s important to have realistic expectations and accurate financial details.

Getting started

Keeping in regular contact with your lenders during difficult times helps build the relationship, and both parties develop a better understanding
of the other’s needs.

You may find that a lot of lenders are willing to help you if they are aware of your situation. Therefore, the first thing you should do is contact
your lenders, explain your current situation and arrange for a meeting.

The object of your discussions with your lender should be to find out what options you have and to negotiate the best financial deal for your individual circumstances.

In preparing for this meeting there are a few things to remember:

• You are important – bank managers are in business to lend money. While they do not want to take unnecessary risks, they are expected to lend a certain amount of finance.
• All partners should attend – it is preferable if all farm partners attend the bank meeting to keep everyone involved, and to enhance negotiations by bringing two or more minds to the job.
• Aim for a win-win – ask your bank manager for the best terms and conditions available from the bank, while demonstrating your
  appreciation of the bank’s position. Know what you expect to achieve during the meeting and be positive in negotiations.

Negotiating well

The aim of your discussions with your lender is to negotiate the best financial deal for your individual circumstances – and to consider all the options available to deal with any issues identified by you or your banker.

The object of the meeting is for both you and your banker to be satisfied with the negotiations and to agree to a deal that is mutually advantageous. Prepare a list of questions that you wish to ask. Examples of the types of questions you may want to ask during these discussions could include:

• Is your level of debt considered by the bank to be a risk to the long-term survival of your business?
• What criteria is the bank using to assess your situation and your farm business’ viability?
• What equity level is sufficient? What market values are being used to calculate the value of your assets?
• What is your capacity to service the current or new borrowings assessed? Is it using one year’s cash flow or an average from say three years
• Can your level of debt be better managed to improve your financial security?
• Can you renegotiate the term or structure of your loan to ease cash flow pressures?
• Is debt consolidation an option to replace several separate loans with one new loan?

Questions you might be asked by your banker, and that you may need to be prepared for are:

• Do you want to continue trading and what are your plans for the future?
• Are you prepared to borrow more and increase your current debt levels?
• How do you view the risks to your business into the future?
• What strategies are you employing to manage in the current operating environment?
• What is your breakeven milk price?
• Are you prepared to sell assets to pay debt and improve short-term cash flow?

There may be many options available to deal with any issues identified and it is worth considering as many as possible before ruling any out. The most appropriate option will depend on the goals and priorities you set for your business, whether risk or serviceability of your debt is your key issue, and what level of risk you and your lending institution are comfortable working with.

Preparing for the meeting

Make sure you know what the bank needs for the meeting and have this prepared beforehand. All lenders want an accurate and complete accounting of your business’ financial position and will want to see:

• a current balance sheet listing assets owned and debts owed;
• this year’s cash flow budget describing income and expenses throughout the year;
• an income estimation and monthly cash flow budget for 2009/10; and
• a lean, mean ‘bare bones’ annual budget for 2009/10.

Statements made do not constitute investment advice. We recommend you seek independent financial advice.

This document was created in conjunction with bankers, industry consultants and farmers.