If you want to build a bad relationship with your banker, buy your combine on your credit card.
“They hate that,” deadpanned Trish Booy, agriculture business development manager at BMO.
“There’s a very big difference between short-term financing and long-term financing. Depending on where you are and what you’re going through, your financing needs are going to change.”
Booy spoke at one of three Success for Women in Agriculture kickoff events last month.
The program, which will run in five Alberta locations in January (see agfoodcouncil.com for details), was prompted by a survey that found a lack of financial literacy is one of the barriers that many women face in their ag careers.
Booy offered a quick primer on things such as short-term versus long-term credit. The latter is used to finance land and equipment; capital improvements; and business expansion — so you need to line up mortgages, term loans, or leases for those items.
She also addressed cash flow — a topic that often trips very experienced business operators.
“Understanding your operating cash flow is critically important,” she said. “You need to know your expenses and know the amount of capital that you need in that time frame to get yourself through.”
Cash flow is one of the key things that bankers look at when deciding to approve financing, she added. Lenders look at the ‘four Ms’ — money, markets, materials, and management.
“We do look at money, which is your cash flow, your past performance, and your projections,” said Booy. “Are you able to pay your interest portion on your loans and your principal? Where is the cash flow coming from that’s going to pay back that loan? Are we going to put you in a situation that’s not good for you?
“Sometimes a banker will say no, and they’re doing that to protect you.”
Banks will also look at your potential markets and the materials you need but ultimately, the decision often comes down to management.
“If you have a really strong manager, they will manage the other three, but if you’ve got a crappy manager, the other three aren’t going to work,” she said. “Any bank will look at management over and above everything else.”
Banks can get a sense of your management style by looking at a few things, said Booy. The first is your personal credit bureau score.
“From a bank’s perspective, if you do a really bad job of managing your personal finances day to day, you’re probably not going to do such a hot job of managing your company’s finances day to day,” she said. “It speaks to management.”
Lenders will also want to know your personal net worth to make sure you have a safety net if times are tough.
“If your business goes belly up, what do you have backing you? Do you have some equity in your home? Do you have some investments or RRSPs? What kind of net worth do you have to save yourself in those times when we are in a recession?”
Having an industry market outlook tells the bank that you’ve put some thought into the “competitive environment that you’re in,” while a financial statement analysis “speaks to past performance.”
“That one is kind of a no-brainer,” said Booy, adding you don’t want to look at just your bottom line when determining your cash flow projections.
“Look at your financial statements and see if you can calculate your earnings before interest, taxes, depreciation, and amortization. That’s more of a cash flow picture that the bank will use when we look at lending to that operation.”
When meeting with your banker, take along your production records, forecasts, financial statements, personal net worth statements, accounts payables and receivables, and a list of inventory. Your lender may also want to see your personal banking information, tax assessment, a copy of fire insurance, and interim financial statements.
It may seem daunting, she said, but remember that your banker is on your side.
“If you walk into a bank, you should have somebody who you can build a relationship with, who you feel is a partner and a trusted adviser,” said Booy. “A banker’s primary duty is to use his or her expertise and sound judgment to help customers make the right decisions for their business.
“So don’t be afraid to have expectations of your banker because your banker works for you and your banker should be there to help you.”