Stock Journal: Agri banking – managing your manager

Stock Journal Feature - February 2024

Agri Banking is changing - you’ve probably noticed, having more Agri-Managers in the past 5 years compared to the 10 previous years. Like all of us in business, banks too are finding it difficult to find and retain key staff. This is unlikely to change anytime soon, as businesses flex with these times.

In future, you should expect more Agri-Manager turnover and more times you have to ‘tell your business story’ to your new Agri Manager! The onus on ‘managing the banking relationship’ now rests with you, less so with your bank.

Options include using a broker or debt adviser to assist in ‘managing your manager’. You’ll still be required to assist the broker/debt adviser with the flow of information so they can present your case to your Agri-Manager. There are costs for using a broker/debt adviser (either bank paid or fee for service) but ultimately the lender pays, so this option is mostly about assessing the value of the service to your business.

On the basis that you will individually managing the banking relationship, with the production season concluding and the new production season about to commence, for many, the annual ‘bank review’ is upon us.  So, how can we ‘Manage our Agri-Manager’ – the banking relationship, present our best case at our bank review and even what we can do to influence interest rates?

What can you do to enhance your banking relationship? If you have debt with a bank, you are in a partnership as your bank owns a percentage of your business (debt/total assets). As in all partnerships, it is important that communication is open and transparent – no surprises for your business partner, none for your Agri-Manager either. So, when the next significant commodity price collapse occurs, or when the next frost or poor Spring finish knocks crop yields around, your Agri-Manager already knows this. What your Agri-Manager doesn’t know is - your plan for your business’s recovery documented in your new ‘reforecast cashflow budget’, projected to a year in year out time when prices/yields recover. No surprises for your Agri-Manager - deliver the problem plus your solution! 

In the new banking horizon, if we are to expect a continued increase in turnover of Agri-Managers, perhaps an induction pack is worth constructing outlining your businesses history, location, types of enterprises (and why), people and skills involved in the business in essence a mini business plan. You know your story, write it down ready for the next Agri-Manager.

Consider too an AGM with your Agri-Manager inviting other professional advisers – accountant, wealth adviser and your agronomist to present their assessment of your business. An AGM of advisers not only provides an opportunity for your advisers to hear from your other professional advisers (integration) but also an opportunity to present to your Agri-Manager your management team and your business management capabilities. In inviting your Agri-Manager to the AGM, ask them ‘what areas of my business do I need to improve in to be less of a risk to you?’ This knowledge is an important aspect when negotiating interest rates.

Part of ‘maintaining’ your banking relationship is the upcoming annual ‘bank review’.  For your bank this meeting is important for them to assess your debt serviceability - can you meet interest commitments while meeting other expense commitments during the next year? Here your bank will require your FY23 taxation financials or drafts (a record of the financial truth) and your future cashflow budget forecast. Your bank is also interested if your facility is meeting your business’s needs (e.g. overdraft clearing to $0 during the year i.e. no long-term debt as short-term debt at higher interest rates), do you require additional finance, and to confirm your current interest rates.

For you, the annual bank review can be either a threat or an opportunity – it depends on how you want to face it! As an opportunity it allows you to ‘paint a positive picture’ about your business’s future, state past successes or if not as positive as you had hoped, then paint the realistic (forward looking) ‘repair picture’ including your assumptions, cashflow budget and balance sheet, then deliver it! Why not treat your next bank annual review as an opportunity to impress your business partner?

Once you’ve ‘painted’ your positive picture now a conversation can occur about your current interest rates. Remember to not assume – if you don’t ask to for a discussion about reviewing your interest rates, then your bank probably thinks you’re happy with your interest rates! You need to ask but also supply information to support your request.

Since May 2022, there have been 13 interest rate rises in 15 months from May 2022. For many Primary producers, interest payments have doubled since May 2022 and now interest is one of the largest monthly cash costs.  

Your interest rate is a combination of the cost that your bank pays to buy money to lend to you (the current RBA rate is 4.35% and banks do lend to one another at additional cost) plus your ‘customer margin’. It’s your ‘customer margin’ that you have some influence, so what support do we need to supply at our upcoming annual bank review?

In short, it’s about how you can demonstrate to your Agri-Manager the 5Cs of credit (see Sheep Connect SA Website for more information) and the business risks you identify as well as your plan to alleviate these business risks should they occur, again ‘problem plus your solution’! If you can demonstrate you are a lower risk, there is the potential for lower interest rates.

Finally, just ask your bank manager at your review ‘what is it that my business needs to focus on this next year, so as to be less of a risk to you?’ Work on the answers over the following year, present your case again at next year’s bank review and…ask for a review of my customer margin.

The banking relationship has changed. What do you need to do to be  ready to navigate the new Agri-banking horizons?