Too many producers still do not have the production, marketing and financial records to demonstrate their tract record and support their numbers. Many loans have not been made that probably could have been repaid simply because of a borrower s inability or unwillingness to provide the lender with complete and well documented historical information on his financial position and performance. Due to the numerous factors affecting production agriculture, cash flow projections frequently vary from the actual outcome especially on the revenue side. Done correctly, the alternatives considered should reflect the business s actual historical performance variability as well as the range of current forecasts, opposed to the 10 and 25 percent reductions in revenue approach that is often used. No commercial lender wants to enter into a situation in which foreclosure is the only alternative if things do not go as planned.
Contingency planning is critical.
There are several factors to consider here. The first is to recognize that a viable net worth is not anything above zero. Most commercial lenders require some minimum equity position, e.g. 30 percent, below which they will not continue financing without an external guarantee. This can cover anything from formal risk management tools to management strategies. The major issue here is to make absolutely sure that both the borrower and the lender understand how these measures work.