In July 2021 I posted a detailed description on how a Bank manager views a farm for lending risk purposes. The advice in it still holds true see link:
However, I recently shared this with a farmer to get the legitimate reaction, “What Bank manager?” This is a truth for many banks and their farming customers, that whilst Bank managers still exist, most farmers do not have a specific named, dedicated Bank manager. The cause of this is a process of cost cutting that has happened throughout the Banking industry for many years and has been accelerated by the covid pandemic. The reason behind this is, in my opinion, it is a race to the bottom on price where no one wishes to pay anything for Banking services and wish to have the cheapest deal enabled by the internet and technology.
Regardless of whether I am correct about this , this does have significant consequences for all businesses, but especially farmers as their business patterns and trading cycles may not be picked up by automated systems and algorithms resulting in inappropriate reduction or decline of lending facilities.
The principles on how a lender views your farming business have not changed. But the processes mean that not all details are necessarily looked at, interpretated or understood to the farmer’s detriment.
I will give a simple example of this from my own personal experience. I have significant wealth, yet due to my semi-retiring my income has dropped. So, despite having considerable cash deposits with my Bank, they wrote to me recently concerned that I cannot afford a £1000 overdraft and will reduce it to £600 in a month’s time. This decision is based upon my account usage, but takes no account of my personal wealth which with this Bank alone is into six figures. The reason for me having the overdraft is to allow for delays that I can occasionally experience when releasing investment monies or work income as my bills go out. Now for me such an automated decision will have little impact, but for a farming business could be devastating.
I emphasise again that how a Bank views your farm has not fundamentally changed, but how that information is gathered, interpreted and used is changing and has particular relevance in two areas: management – how well the business is run; serviceability – the businesses ability to repay debt.
The largest two factors that are subject to automatic assessment are how the bank account is run and your annual accounts. Both these issues can be problematic for farmers as any computer based assessment on how an account is run, or how annual accounts are analysed risk not taking into account the various trading cycles a farming business can experience. This is particularly relevant for trading cycles that are greater than twelve months.
The trading cycle is put simply the period from when stock and raw materials are purchased to when the finished goods are sold and payment received. For many combinable crops this may be 18 months. For some larger livestock the period may be even longer.
How a bank account is run is a key factor. If you exceed agreed limits or have items returned unpaid due to lack of funds it is greatly to your detriment when seeking facilities. It will prevent automatic renewal of facilities or cause increased lending to be declined. However, even if your account is kept within agreed limits it may not be rated very highly from a lending point of view if the overdraft does not swing into credit over a twelve month period. You cannot educate the bank manager about your trading cycle if you have no bank manager! In addition your bank account can be subject to further analysis to the types of payee receiving funds from you. This can be built into your risk profile.
Similarly annual accounts may not capture profitability, or cash positive business over a twelve month period due to the timing of the trading cycle. It is increasingly highly important that you get accounts produced as soon as possible after the year end, preferably within three to six months of the year end. Later accounts can indicate poor management and loose their value as they become increasingly historic. Even if your accounts show a loss, whilst it may be detrimental to your borrowing case it can help if you proactively explain this and how it will change with appropriate budgets and forecasts or help if you need to appeal against an adverse decision.
So it may be that the automated processes and analysis can be stacked against some farming businesses. What should you do if you find yourself subject to a lending decision to decline or remove facilities?
Note, if you are having an overdraft facility removed on a business account you should be given a month’s notice, unless your facility has an expiry date to be complied with. You should never assume the facility will automatically renew.
If you are having a facility declined or removed you should receive a written notification and reason for the decision. When you have the reason for the decision you can follow your Bank’s appeal procedure and appeal against this decision. An appeal against declined facilities forces your Bank to have a greater human intervention and more people review that decision. Your appeal needs to answer or challenge the cause of the decline. To do so successfully you may need further information, management figures, forecast and budgets as well as up to date accounts.
The decision can only be as good as the information you give. The simple fact is that as Bank staff reduce I am seeing more farms in this position and lack of financial information can be to the severe detriment of the business.