Getting the most from your bank

Although some commentators predicted that the farming sector would be relatively well protected from the credit crunch, many agricultural businesses have still struggled to access new credit facilities and refinance existing loans.

Many of these businesses have had to hold back much-needed investment plans, but there appears to be room for cautious optimism. Banks are opening up with many appearing far more willing to listen and happier to lend over the last three months.

Risk versus relationships

But, the banks’ approach to risk has changed following the credit crunch. Informality has been replaced by formality, with those in the farming sector no longer able to rely on a strong relationship with a bank manager in order to secure new funding.

To get a foot in the door of a bank, it is now more important than ever that farm businesses understand clearly what they want and when they want it.

Banks’ heightened focus on risk has led to a far greater amount of financial information being required, as well as a standardisation of the information requested.

Details concerning the investment “opportunity” need to be presented in a format expected by potential funders, including an overview of “investment highlights”, details on how any increased funding will be used, along with assumptions behind the financial forecasts.

As part of the process, forecasts are required covering usually three years of monthly integrated profit and loss, balance sheet and cash flows.

This is not always done, however. The level of detail contained within management information typically relied upon by farms is simply not sufficient in the current climate.

One solution is for the information to be produced by specialist corporate financiers – most of whom will add credibility to the proposal by virtue of their existing relationships with major banks. This typically costs in the region of £10,000-30,000, depending on the size of the project, but can be money well spent.

A recent example concerns a farm which required a substantial injection of finance for new buildings to help it meet new EU regulations. The request initially met a warm response but it soon became clear that formal approval would only be granted following the production of a coherent business plan which ticked all boxes set out by the credit committee. I’m convinced there are similar businesses which have had valid cases rejected on the grounds of presentation.

Security versus serviceability

Banks have historically focused on the security underpinning any lend and although this is still important, the primary focus has shifted to serviceability. In other words, banks are anxious to ensure all capital and interest repayments can be met, even if the business slightly underperforms.

Through building a robust financial model, sensitivities can be run which consider the cash impact of changes in trading performance. This provides banks with confidence and ensures the amount borrowed is correct.

This closer monitoring results in many banks using the detailed information they receive ahead of agreeing to the loan, to monitor performance after the deal is done.

Such performance targets should be agreed in advance, set at appropriate levels, with information provided accurately in the agreed time frames. Breaching agreed lending covenants could lead to a bank involving its “special situations” team – but failure to provide the information in the first place will mean the application will quite simply never get off the ground.

Any financial proposal should demonstrate, in a way which banks understand, how sales growth will impact on working capital and cash. Although new opportunities to expand are frequently viewed by the business as positive, banks recognise that growth often leads to short-term cash flow pressures.

In a period of heightened nervousness, banks will require a clear understanding of what the level of increased exposure is, how it will be controlled and when the expansion will lead to a return to the existing cash position. Modelling these impacts provide the banks with the comfort needed to support such growth.

Banks are definitely opening up for business, but the future is far from clear. Banks have changed fundamentally and relationships are unlikely to return to pre-credit crunch days any time soon. They are not about to turn on a tap of cash for the agricultural sector, but those businesses which demonstrate an understanding of their requirements, through the production of a credible proposal will find their finance partner willing to reciprocate.