Good Banking Practices for Farmers

Positive relationships with your business partners, result in a more efficient and beneficial working relationship for all parties. Your bank is one of those business partners. We have outlined some areas below where you might be able to improve your banking relationship.

Maintaining accounts

Furnishing complete, accurate and up to date accounts of your farm business will help a lender in assessing your loan application. Up to date financial accounts for 3-4 years will provide the lender with an overview of the farms performance over a period of time and not just during a year when the farm may have performed particularly well or particularly poorly.

Know your business

If you are approaching your bank for finance it is important for you to know your business so you can successfully communicate your business plans to the bank. This may require some preparation and it can be beneficial to enlist the help of a professional. Knowing your production costs, your efficiency factors and your existing financial commitments are just some of the areas that will help display a well prepared proposal and enhance your application.

Purpose of Borrowing

When applying for business finance the purpose of your loans should always have the long-term goal of adding value to your business. Planning for the long term future of your farm is key to its continued success. A detailed farm business plan is essential for the planning and successful management of the farm.

Farm Management

Before a lender can adjudicate on a loan application, in addition to past performance, they will assess what is likely to happen in the future. Therefore when applying for finance it is very important that you undertake a farm plan which takes account of the immediate future and where the farm is going in the long term. The farm business plan should contain details of the farm finance required, its purpose, and the proposed repayment schedule. Ideally, the business plan would include income and expenditure projections and where possible cashflow budgets. In addition to demonstrating good management skills, this will also help the lender determine your credit needs and the most suitable repayment schedule for your business.

Choose the correct type of credit

It is very important that you choose the most appropriate form of credit for the application of the loan. One aspect of the decision is that you should choose a funding term that closely matches the productive life of the asset you are borrowing for. i.e. stock loans should not extend beyond the lifetime of the asset. Likewise, money borrowed for one purpose should never be used for a different purpose. You should be careful to avoid over extending yourself and ensure that your new investment will not cause short term cashflow problems.

If you are planning on carrying out significant capital expenditure on your farm from cashflow, it is advisable to talk to your bank before hand to discuss your plans with them. It is important to keep your bank informed of your plans and to discuss with them the most appropriate method of financing your investment. Detailed costings, income and expenditure projections and cashflow budgets will all be beneficial when discussing your plans with your bank.

Repayment obligations

The most common problem between a bank and a borrower arises when repayment obligations are not met as they fall due. Choosing an appropriate borrowing level, term and repayment level will in most cases avoid problems. However, unforeseen events can occur. Short term income issues or cashflow problems may make it difficult for you to meet your financial commitments. If you begin to encounter difficulty with repayments it is important that you contact your bank immediately so that corrective measures can be taken. The sooner the bank knows about the problem the easier it will be for both parties involved to deal with it and minimise the financial impact.

Openness with your Bank

It is vitally important that a borrower keeps their lender fully informed of their business, both at an initial loan application stage and going forward. As the project progresses your lender will often be able to offer professional advice on choosing the most suitable type of finance but only if they are fully aware of the facts.

If a financial problem does occur do not ignore it. Talk to your financial institution as early as possible to discuss the most appropriate options. The sooner your bank knows the easier it will be to deal with the problem.

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