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AgAmerica image


By Gayle Smith


Most lenders want to see their customers succeed. That was the message delivered by James Franzen, who is an executive vice president of Town and Country Bank in Kearney, Neb. Franzen discussed developing a good relationship with a lender during the Nebraska Women in Agriculture conference.

“Ultimately, lenders and loan customers want the same thing – a borrower who is successful in business is good for everyone involved,” Franzen says. “If things go right, look at how much money we can make, but if things go wrong, look at how much money we can lose,” he tells a group of nearly 50 farm women. 

Franzen became a farm lender as a result of the farm crisis in the 1980s. He recalls the 70s when the farm economy was booming, which lead to loose lending, and thinking that prices would continue to go up. In the 1980s, everything declined and even though prices were at their lowest, farmers didn’t have any money to buy what they needed. “Out of the 80s farm crisis, I thought there had to be a better way, which is why I became a lender,” he explains. 

Franzen says since becoming a lender, his dad feels the frustration of coming up with a plan, only to have his son poke holes in it. “It’s frustrating for dad, but it’s a natural relationship for an entrepreneur,” he says. “If I lend you $100,000, the best we can hope for as a bank is to get the $100,000 back, plus five percent interest,” he adds. “There is no upside to that, only things that can go wrong. As a lender, I am looking at if I believe in your proposal, and what kind of things could go wrong. I may ask you questions like if you have looked into crop insurance, what you will do if there is a hail storm that wipes out your crop, or what kind of plan you have if interest rates rise this year,” he explains. “It can seem like we are negative, but natural incentives create that. It is just how we look at things,” he adds.

Franzen says there are five ‘C’s of credit – character, capital, capacity, collateral and conditions. The first thing the lender looks at is your character. “We want borrowers who are honest, have good management skills, get things done, follow through, and commit to a task,” he says. “My first boss told me to never do business with a crook, because I’d never win. It was a good piece of advice that plays a huge role in my lending decisions. I think I work with a lot of people who fall somewhere in the middle – maybe not deliberately. I love working with my customers who meet the character specifications because I feel I can develop long-term working relationships with them,” he states.

Capital is net worth, or what the borrower can bring to the table. Franzen says borrowers can document that with a balance sheet or a statement of net worth. “Most ag lenders are pretty good at helping their customers develop a balance sheet. They want to help you create a history and see where you are headed,” he says. 

“An accurate balance sheet that shows where you are at is important in the lending process,” he continues “It is never about giving just enough information for a file. I want the complete picture so I can help you move ahead,” he adds.

Net worth is a statement that adds up the total assets and subtracts the total loans. It includes things like working capital, which are the current assets that the borrower intends to sell, not ones that could be sold. The statement also includes liabilities, which are outstanding loans that are due to clean up last year’s business, Franzen says.

“In most banker’s minds, they want to see the one-third, two-third rule, whether they realize it or not,” he explains. “If you have 10 percent, and are asking to borrow 90 percent, that makes the margin thin if anything goes wrong,” he adds.

Franzen says farm customers typically have a hard time distinguishing between current and future income, and which bills coming in need to be added to the balance sheet. “I can get a good idea of growth by looking at the working capital and comparing it to last year,” he says. “It also indicates cash flow.”

He cautions that liquid investments like mutual funds or a stock market account aren’t really considered working capital because they are considered long term capital or liquid assets. “Learn to think of your working capital as your savings account,” he explains. “Working capital is having enough left to pay the bank after your crops and livestock are sold. We consider it a crisis when you don’t have enough to pay back a loan,” he adds.

“If you do your financial statements correctly, and about the same time every year, you can take this year’s working capital minus last year’s and it will be a good indicator of what your cash flow actually is,” he says.

“Working capital is the first line of defense if things go wrong,” Franzen explains. “If I had a $150,000 last year, and a $100,000 this year, I still have enough cash to cover everything. I may start the next year with things a little tighter, but at least we don’t have to restructure the loan,” he adds.