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Contracts: Lender Concerns

This article discusses the various concerns that lenders may have when considering a contract enterprise. It provides insights on management adjustment, financial conditions, cash flow, repayment capacity, capital concerns, collateral concerns, management concerns, lender conditions, and differences in opinion. It emphasizes the importance of clear communication and understanding between the customer and the lender.

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Contracts: Lender Concerns

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  1. Contracts: Lender Concerns (“YOU ARE GOING TO WHAT?!”)

  2. The Lender’s Concern Depends: Management Stretched? No Concern Contract Enterprise New Concept Accepted Practice Financial Condition Strong Weak * Management adjustment is too much. * Does the customer really understand this well enough to make a decision ? * No room for error financially. * How would this improve this customer’s risk profile? * Can I get this customer into an FSA Guarantee? * Can I explain this to the board? No Change Some Adjustment Big Change Management Changes

  3. 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 . . . Why The Lender Cares

  4. 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 . . .

  5. 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.

  6. 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.

  7. 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.

  8. 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?

  9. 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?

  10. 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

  11. 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.

  12. 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.

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