How many times have you been frustrated with the lending process?  How many times have you questioned why your banker is asking certain questions?

 

The relationship between an agricultural borrower and their banker is often complex. Having spent considerable time in the banking sector, I’ve observed the intricacies of this dynamic firsthand. Lenders genuinely want to extend credit; they have sales targets and a desire to build strong client relationships. However, this desire often meets the crucial checks and balances of credit risk departments, which are appropriately focused on long-term stability for their institution.

 

When a bank lends money, it commits to a relationship for up to 25 years. This isn’t like selling a simple product with no long-term recourse. It carries significant, multi-decade risk, meaning the bank must be confident in your financial stability today and well into the future.

 

Often, your individual lender will be eager to please, to say “yes,” and to maintain the relationship to secure the loan. Behind the scenes, however, credit risk personnel are asking deeper questions. This is where friction can arise, and it’s essential for you, as a borrower, to understand this dynamic.

Understanding Perceived Risks

You need to anticipate and understand the risks your bank might perceive. These might not be actual risks in your operation, but the bank’s internal assessment or past experiences with other borrowers could lead them to “dig in” with more questions. They might be telling themselves a story based on limited information.

 

Therefore, cultivating an open and transparent relationship with your banker is paramount. They need to feel comfortable approaching you with challenges or concerns. A common struggle for lenders is encountering resistance or frustration from borrowers who question why they are being asked certain things, especially if they’ve been clients for a long time and believe they are a good risk.

 

I like to remind people that what the bank views as risk is often risk presented to you as the business owner.  Is debt service getting tight?  Is working capital compressed?  If those are the types of questions your bank is asking, they should also concern you.  

 

Controlling the Narrative

As a borrower, you must control the narrative. Understand the potential risks from the bank’s perspective, and proactively provide your rationale, risk mitigation strategies, or explanations for why a perceived risk isn’t actually an issue for your operation. You need to tell your story effectively; otherwise, the bank, or someone in their credit department, will tell it for you, potentially with an incomplete understanding.

 

When your banker asks questions, try to understand their underlying motivation. Is it a lack of understanding on their part, or does it stem from a deeper risk concern? Engaging in these conversations actively will help you learn more about what the bank is looking for. This knowledge will enable you to anticipate their concerns, get ahead of potential issues, and ultimately foster a much stronger and more efficient relationship. While the answer will often be “yes” to your lending requests in the long run, engaging in these transparent discussions creates an encouraging environment where your lender feels comfortable approaching you, leading to a much better experience for both you and the bank, and likely more opportunities for future collaboration.

 

I have witnessed a lot of times where borrowers become frustrated with the questions, but again, not responding to these questions will lead to the bank filling in their own blanks, which will always lean to the most conservative position.  With that said, your lender also needs to be prepared and dig into all of these potential questions rather than going back and forth constantly.  This needs to be managed from both ends.

 

I have been involved in thousands of lending transactions. Those who engage in conversations with their lenders, provide their own assessment of their operation, along with how they are managing that risk, generally see more favourable outcomes in terms of approvals, turnaround times, covenants, etc.

 

Lastly, I strongly encourage you to have a conversation with your bank about what their main risk items were at the last request; you may be surprised to hear their answers. This also gives you insight to help you assist in your next application.