When in an expansion mode, the teamwork needed between you and your lender could be compared to a pair of policemen working as partners. You might not expect your teammate to take a bullet for you, but you do expect him to cover your backside when signs of trouble pop up.
Lee Fuchs, senior lending officer with AgriBank FCB in St. Paul, MN, has developed a list of six characteristics growth-oriented pork producers should look for in a good lender.
1. A high enough lending limit so he can serve as your primary source of credit.
"That means having a big enough lending limit so that, as you grow, you won't out-grow the lender," says Fuchs. "It can be a disaster if you get into the middle of an expansion phase and hit a lending limit."
You could get caught, saying: "I have these opportunities and I have to make a decision on them in the next 30 days or they will probably go away." You don't have enough time to find another lender capable of supplying $1 million, $2 million or even more to capture the opportunity.
Fuchs tell of a producer who had built his sow unit and half the finishing facilities when the lender informed him he's hit the lending limit. Bank auditors were putting on pressure to draw back.
The producer couldn't maximize profit by selling half the production as 50-lb. pigs when cash flows were based on marketing all pigs at 260 lb.
2. Have a wide scope of the pork industry.
Scope means your lender understands the changes occurring in the industry. You don't want a lender who hears about a manure spill, gets scared and pulls back. Nor do you want a lender who knows a producer who seems to be doing really well, therefore is gung-ho on the whole industry.
"If they don't understand the whole picture - the broad picture - they can be either too pessimistic and hold back or too optimistic for the wrong reasons," says Fuchs. "You need somebody who will push you forward sometimes and hold you back other times."
Admitting it's a controversial thing to say, Fuchs says small community banks generally are not good lenders for big pork producers. Often they don't have either the lending capacity or the scope of understanding of the industry.
"There are, however, some relatively small lenders who have a good scope of the industry because they have become students of the industry," he admits.
3. Have variety and flexibility in financing terms.
"If a lender will not provide 10-year, fixed rates at a reasonable interest rate, I feel that is not a good lender for pork producers," says Fuchs. "When you're big and growing, you can't plan at 2- and 3-year intervals. You need to plan 10 years or more ahead."
4. Find a business lender or a relationship lender rather than an asset-based lender.
Your lender needs to see you as a businessman with a business operation that he wants to finance - not as something that can be broken up and sold off in pieces if things go sour.
A good lender will loan for everything because he sees an integrated operation that has more value as a package than it does as separate parts.
5. The best lenders for big hog operations are cash-flow lenders rather than collateral lenders.
Cash flow is the ability to pay off the loan and keep the operation going. Collateral is the ability to pay off the loan by selling the assets and getting out of business.
Given those descriptions, it's easy to decide which way you want your lender to view you and your business. Collateral lenders don't show a lot of faith in your ability to make profit.
"The late 1970s and early 1980s are a good example of collateral lending," Fuchs explains. "Lenders loaned money for overpriced land because the collateral was there even though the cash flow figures were screaming that the farmer shouldn't borrow money on that high-priced land."
6. Good lenders see themselves as a strategic partner for you.
Such a lender is capable of providing services beyond loaning money - like management assistance.
"This kind of lender is going to help you find the advice that will help you accomplish your plan, not just be a source of money," says Fuchs. "It's another source of intellectual capital to help you achieve your long term business plan."
The lender sees his success and future are dependent on your success as a profitable producer.
"If you talk to a dozen other producers who are the size you plan to be and ask where they get financing and what their experience is with their lender, you'll find a common denominator," says Fuchs. "You'll probably see that there are a few leading lenders who are best suited to your needs."
With fax machines, e-mail and phones attached to most people, distance should not be a limiting factor.-- L