Days of Handshake Are Gone
Oh, how the times have changed – Let’s face it. The days of the “handshake equals dairy loan” are long gone! Actually, it’s been that way for 25 years. I find it remarkable that some people think that “Old Bob” down at the bank still exists. They simply told Bob what they needed, shook hands and signed one sheet of paper before achieving access to unlimited loan amounts. At least that is how they remember the process. Was it truly that simple? I don’t know because I wasn’t there. What has changed? Here is a list of items that come to mind for me:
1) The savings and loan debacle of the 1980’s changed forever how banks were required to document and monitor loans.
2) The resulting sale of many assets, for just pennies on the dollar greatly increased the level of outside auditor scrutiny.
3) In turn, this boosted the amount of “internal auditing” that banks do to prepare for these outside auditors.
4) So, when your loan officer calls and asks for an item, don’t think they are being a problem. He is simply attempting to keep you out of the “problem loan” category.
5) We are being introduced to what seems like excessive documentation. Have you seen a set of loan documents lately? Most of them could be used to anchor a small boat. What can you do in response?
- When you meet with your loan officer to complete your annual loan renewals or to request new funds for a project, show up with more than just your tax returns. How about a specific financial plan stating where you plan to take your business during the next 12 months or five years?
- Provide them with solid Certified Public Accountant (CPA) reviewed financial statements. These are an investment in the future of your business. I recently had a client who seemed surprised that his bank was requiring him to acquire CPA-reviewed financial statements as part of his loan approval process. He is claiming amnesia, but I assure you that I forewarned him that this was coming back in 2002. His business and its related borrowing needs were growing. Thus, as for any borrower, his reporting requirements had increased as well.
- Provide the bank with a projection of the next 12 months’ cash flows for your operation. Give them a fair market value balance sheet, detailed inventory report of your herd, feed inventory, and investment in crops.
This reporting provides you and your banker with a clear picture of your current loans, and where you plan to take your business. The client I mentioned was right. This did represent a big change for him. However, General Eric Shinseki, chief of staff for the U.S. Army summed it up well. “If you don’t like change, you’re going to like irrelevance even less!” That’s true for our industry, too. Make your necessary changes today!