Our author: Christian Solle, North Rhine-Westphalia Chamber of Agriculture
Long-term investment or short-term liquidity injection – a loan can be an option for you for various reasons. For example, the market situation in the pig sector has caused reserves on many farms to melt away. Or else, an investment in a new animal welfare barn is pending. Then the question inevitably arises: “How do I approach the talks with the bank”.
You should always keep this in mind. You are not a petitioner, but a negotiating partner on an equal footing. This should form the basis for your cooperation. Banks that are active in the agricultural sector are usually well acquainted with the situation of farmers, but it also happens again and again that consultants are not familiar with all the specifics of agriculture. However, this does not necessarily have to be a disadvantage, as long as the consultant is willing to listen and you can explain your situation to him in a structured manner.
We have nine tangible tips for you on how to prepare yourself for the loan interview with the bank. We will also explain to you how a bank decides on the granting of loans. This can also help you later.
1. Take the initiative early
Don’t procrastinate on the appointment. Talk to the bank employee early on and make an appointment. If the company finds itself in a predicament, there is often no room for negotiation.
2. Try to choose the banker you trust
Even if at the end of the day it’s about economic reality, it’s an advantage if the “chemistry” between you and the banker is right. This makes handling easier and is good for the business relationship. Many banks also have specialized agricultural account managers. They may be more familiar with your challenges. They don’t necessarily have to be best friends either. If the bank’s offer is right, you can get over an adviser who is less likeable to you. Business is business.
3. Prepare for the bank interview
Prepare a bank document. Your advisor can help you with this. This document informs the bank about the following issues, among others:
- How is the company currently set up (area, workforce, production capacities, family circumstances, etc.)?
- What economic results does the operation achieve in terms of profitability, liquidity and stability?
- What business strategy are you pursuing (operational orientation, number of pillars, dealing with risks, etc.)?
- How much credit is needed (capital requirement)?
- How should it be financed?
- How is liquidity secured?
Here it is good if you play through scenarios with good, medium and bad prizes. Use graphs and charts as well. You could create an organizational chart of your company structure, or visualize the course of your equity over the years. Don’t forget: In addition to the account manager, the documents also go to the back office. The employees there process, analyze and evaluate your application with regard to the risks. However, they are not specialists in agriculture, so go into agricultural peculiarities and explain them. Pick up your bankers!
4. Choose an appropriate setting for the conversation
Plan enough time for the bank interview. Make sure that the conversation will not be disturbed and that it takes place in a suitable room. Accept the bank employee’s appointment suggestions. If you feel safer with home advantage, invite your advisor to your home (see also point 8).
5. Appear confident
Appear as an equal business partner in the conversation. However, be realistic and natural. Develop future prospects for your company. The bank would like to know whether a liquidity bottleneck is the result of a price crisis or a cost crisis, ie possibly inadequate performance in production meets a bad market situation or “just” the sales prices are not playing along at the moment. Contribution margins and key production figures presented by you can already show the consultant that you have your production under control. Otherwise you can also get comparative figures, for example from business groups. Above all, there is the question of whether the company’s ability to service capital is secured in the long term.
6. Use your negotiating leeway
Get loan offers from multiple banks to compare terms. You can always find current credit conditions on the Internet (e.g. www.rentenbank.de) and in top agrar. Also discuss possible financing alternatives in the conversation. Collateral is required for all financing. Respect and discuss your bank’s wishes. Present your business concept and then negotiate the loan terms. Get a written offer. The discussion here includes the following points:
- How can the borrowed capital be secured? This is usually about mortgages. If possible, keep the yard plot out of the way in order to be able to primarily secure old-age benefits when the yard is handed over. In addition, only lend as many strokes as necessary. In the case of machines or PV systems, assignments as security are also a typical means.
- What credit terms can the bank offer (loan amount, term, interest rate, fixed interest rate, initial years without repayment, special repayment options, etc.)? ▶
- How are risks taken into account and secured (market and production risks, personal risks, etc.)?
7. Consult your advisor
Also put your entrepreneurial qualities in the foreground. Finally, the personal components flow into the rating and thus the interest rate offered. If necessary, bring in an external advisor to help you with the bank meeting.
8. Invite your banker to visit the company
Present to the banker what you have built up and developed in your company over the years. Use your home field advantage. Make sure in advance that the business is in presentable condition.
9. Create a log of the conversation
Summarize the most important points of the conversation in writing. Record the outcome of the negotiations and the agreed course of action.
The bank and its decision-making process
A lot happens behind the scenes at the bank between the negotiations and the signing of the loan agreement. When lending, banks are subject to numerous strict legal regulations, compliance with which is closely monitored. In addition, however, each bank also pursues its own business policy, ie in which economic segments the bank would like to be active and where not. The decision-making powers are also regulated differently depending on the bank. Your account manager is not always the decision maker. For larger sums, he must obtain the approval of his superior or the supervisory body. In addition, the loan application – and thus also the customer advisor – is checked internally by the so-called back office.
Whether and on what terms you get the loan depends largely on whether you can service the debt in the future and how high the risk of default is. The ability to service debt is assessed on the basis of the previous and current economic performance and the future prospects of the company (creditworthiness). If there is a risk that the debt service cannot be provided, the bank will require additional collateral. A bad credit rating can mean that the bank does not approve the loan, even with full collateral. Creditworthiness and collateral are the key components for the bank to assess risk and make a credit decision.
Hard and soft factors
The customer advisor’s subjective assessment of your entrepreneurial skills, the so-called “soft factors”, but also the “hard” facts of your business flow into the decision to grant a loan. This information is systematically evaluated in the bank. The credit default risk is determined with the help of creditworthiness and collateral. The credit rating differs from bank to bank, primarily with regard to the factors involved and their weighting. However, the criteria are very similar and include, among others:
- Quality of management: personal impression, entrepreneurial skills, commercial and technical qualifications, training and further education, etc. The bank’s previous experiences with the customer are also taken into account here. In addition, banks use external sources of information, such as the Schufa.
- Operating conditions: organization of the company, operational strategy, signs of a threat to the company, etc.
- Sector and market situation: Are you active in a growth sector or is demand falling? In shrinking markets, the question arises as to whether to diversify and build new pillars to secure the future. Where are comparable companies and what results are they achieving? How are the market developments to be assessed?
- Economic conditions:
- Earnings situation (profits, key earnings figures)
- Financial position (equity, private withdrawals, investments, asset ratios)
- Financial position (debt, liquidity, ability to service debt)
- The most important source here is the annual financial statements. For the bank, not only the current, but also the further development of the company is important. Banks often require an insight into private financial circumstances.
- Previous business relationship and payment behavior: Reliable information behavior and transparency towards the bank is required here – even in difficult times. Here it can take revenge, for example, if in the past annual financial statements were submitted late and only after repeated requests. With regard to account management, it has a negative effect if credit lines are not adhered to or are regularly fully utilized. The decision-making processes are increasingly standardized within the bank. Even after the loan has been paid out, the creditworthiness and the collateral are continuously checked on the basis of the submitted annual financial statements and other operating figures.
You should have a good grasp of your own numbers. This helps you in the conversation and proper and detailed documents also simplify the subsequent rating. Assume that the bank recognizes the critical items in the bookkeeping and expects explanations from you. Furthermore, you should be able to name concrete measures how you want to improve the situation in the event of a financial bottleneck and how you want to ensure the ability to service debt in the future.
However, if you have prepared yourself well, as in the points mentioned above, and have important documents ready, you need not be afraid of critical questions and the subsequent examination of the bank.
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