Contracts: Lender Concerns

(“YOU ARE GOING TO WHAT?!”)

The Lender’s Concern Depends:

C

ontr

act E

nter

prise

New

Con

cept

Acc

epte

d Pr

actic

e

Financial Condition

Strong

Weak

No Change Some Adjustment Big Change

Management Changes

NoConcern

Management Stretched?

* Does the customer really understand thiswell enough to make a decision ?

* How would this improvethis customer’s risk profile?

* Can I explain this to the board?

* Managementadjustment is too much.

* Can I get this customerinto an FSA Guarantee?

* No room for errorfinancially.

Why The Lender Cares

A New Enterprise: Changes a customers risk profile for the

lending institution (win-win?).

The contract enterprise may be beneficial to the customer personally but not to the lending institution risk objectives and constraints.

Not asking for additional funds? The lender still needs to know. Why . . .

New Money or Not . . .

Be Ready to Explain the Obvious: What is the enterprise?

The customer must understand enterprise and contract for the lender to understand.

Who is offering the contract? Why this makes sense for the customer?

The financial benefits are . . .It is manageable because . . .Here is how it fits in the total operation . . .

Cash Flow Concerns

Contract terms may change cash flow. Buyers call versus harvest delivery.

Will additional advances be required? Timing change only. Higher level of advances?

Base payment certainty.

Repayment Capacity

In what way does repayment change? Overall Level - up or down. Variability- if level falls is it more

dependable?

Depreciation and Contract Economics. Is it as attractive without the tax deduction? Income tax time-bombs. Consider sinking Funds.

Capital Concerns

Does enterprise require too much debt? Relative to new earnings and debt service. LTV and advance rate concerns are tough.

Asset “quality” may become issue.

Another lender enters, cause for concern.

Collateral Concerns

Operating Lender Would this crop be easy to market? Is contract management possible?

Real Estate Lender What does this do to the value of the land? What does it do to marketability? Are environmental risks controlled?

Management Concerns

First the cultural practices. Can the customer handle the change? Company controlled practices:

technical support versus income control.

Does it change the operation scale? Farmer versus personnel manager. Does the equipment and storage still fit?

Lender Conditions

Assignment of ProceedsSuccessor in Interest Clause

Lender reserves the right to step in.Easement Priority Agreements

Manure issue mostlyCollateral Assignment

Marketing AllotmentMiscellaneous Covenants

Differences in Opinion

How much of this enterprise? “Plunger” versus “Player” Contracting firms typically prefer fewer

growers to administer (but not too big). Subject to geography, cultural concerns. Be aware of who else is doing this and

where else this enterprise is happening. Watch out for the fringe.

In Any Case . .

Starting on good financials today will help explain a contracting proposal tomorrow.

If considering a significant change: It is no time to shop for a new lender. If your lender is able and willing and you have a

good relationship . . . If not, find the right lender and start developing

trust and respect.