Jeremy Lee, Agribusiness Consultant
Taylor Beutler, CPA, Agribusiness Consultant
Economic shifts and marketplace strains are challenging agricultural entities as they seek to access capital to fund operations and strategic growth, as well as day-to-day operations.
Higher interest rates, continuing inflation and persistent concerns about the global supply chain are creating financial stress even in the most stable organizations and impacting their relationships with lenders.
But there are several strategies companies can put in place immediately to ride out the bumpy economic storm, stabilizing both their long-term strategic objectives and short-term operational functions.
Pivoting Your Long-term Strategy
Agriculture is a capital-intensive and cash-intensive industry, with approximately $460 billion in total farm expenditures forecasted for 2023 by the Farm Bureau. Capital is the fuel that keeps agriculture businesses going, and the marketplace needs access to capital for the economy to continue moving.
Businesses are facing multiple pressures in terms of long-term strategy, with access to capital being the top concern. Rising interest rates and a tightening of lending standards among banks spooked by the failure of Silicon Valley Bank (SVB) last winter have changed the lending landscape. Even companies with long-term banking relationships are encountering difficulty raising capital.
The collapse of SVB has pushed nearly all banks to place a greater emphasis on risk management. Consequently, your business may not fit the new underwriting standards your bank has implemented. It’s important to remember that not all banks are tightening up lending standards, so if your company is having difficulty accessing capital that is needed for continued growth, talk with your bank about how you can obtain the financing you need.
That being said, prepare for any bank – your long-term bank or a new one – to expect hard documentation of your financial forecasts, industry outlook and growth plans to support your loan application. You must show a solid return.
It’s important for borrowers to understand the impact that consolidation within the banking industry has on banking relationships. A client recently discovered this when trying to increase the already substantial amount of money their company borrows from a commercial bank that had gone through three consolidations in recent years. The client didn’t feel the lending relationship was the same as it was five years ago. The bank was less responsive to their needs, despite the customer’s strong balance sheet and long-term record with the bank. In this circumstance, a reasonable option would be to renegotiate with the lender or shop the loan around to other banks.
In other words, you can and should negotiate with your banker just as you would with any other business relationship. Show them the value proposition of keeping your business, as opposed to losing it. Negotiating debt terms is growing in importance since the agriculture industry is currently holding a lot of fixed-term debt that will come due over the next two years and will have to be refinanced.
It’s important to remember that the best banking relationships are long-term relationships. If your relationship with your current lender has been strong through economic ups and downs, there may be ways to unlock the financing you need through negotiation. Farm owners can find more equitable terms with current lenders or shop for better options with other lenders, whether traditional and nontraditional. The goal is to provide more favorable terms such as collateral requirements, loan covenants, repayment requirements, interest rates or other needs of priority to the borrower. Finding the right program to fit your needs can be a challenge, but it’s worth it to find the best way to provide additional liquidity in the current economy.
Managing the Short-term Challenges
A long-term strategic approach to accessing capital is impossible without strong short-term day-to-day financial and operational management. A common complaint from business owners is that they can’t figure out where all the cash went. With the rapid inflow and outflow of money in agriculture-related businesses, it’s easy to lose track if you’re not generating the right financial data.
A statement of cash flows and a weekly cash needs forecast provide insight into areas where your business may be losing cash, as well as a blueprint for improvement. Yet very few businesses generate a statement of cash flows, in large part because business owners don’t know how helpful the statement can be. They are accustomed to generating an income statement and balance sheet, but those don’t provide the metrics and insight that a statement of cash flows provides.
Moreover, the weekly cash needs forecast – gleaned from the statement of cash flows – provides data on how much cash must be generated by borrowing on a weekly basis. The bank needs to see this.
With today’s inflation and rising interest rates, business owners need more sophisticated data to understand how to navigate issues of expense control, pricing and profitability. With clean and reliable data, we can show in plain terms the amount of money required to run a business, and what the impact is on the owner’s bank account when the cost of inputs rises 20%.
Accounts receivable, accounts payable and inventory are the big drivers of cash flow in a business, and inventory control is a key tactic to keep cash flow under control. With high interest rates, this is not a time to overbuy inventory. To the extent possible, business owners should shift to just-in-time inventory management, though that may be difficult for some agricultural sectors because of continuing supply chain risks. If you rely heavily on inventory from China, you may need to keep more on hand than is ideal. However, if your inventory is sourced domestically, just-in-time inventory management can help keep carrying costs down.
How We Can Help
For a review of your company’s cash flow and a discussion of accounting measures that can improve your liquidity, contact your Frost CFO Services advisor.
