Contracts:
Lender
Concerns
(“YOU ARE GOING TO WHAT?!”)
The Lender’s Concern Depends:
No
Concern
Management
Stretched?
* Does the customer * Management
really understand this adjustment is too much.
well enough to make
* No room for error
a decision ?
financially.
* How would this improve
this customer’s risk profile?
* Can I get this customer
* Can I explain this to the board? into an FSA Guarantee?
No Change
Some Adjustment
Management Changes
Big Change
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 Proceeds
Successor in Interest Clause
Lender reserves the right to step in.
Easement Priority Agreements
Manure issue mostly
Collateral Assignment
Marketing Allotment
Miscellaneous 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.