Fighting Drought by Improving Cash Flow
In a disaster situation such as drought, cash flow is your key to preparedness, management and recovery. But when approaching a bank, there’s always the risk that you can’t get the finance that you need or that suits your business.
In these cases, understanding your operation’s risk rating, and what banks look for when assessing finance options, could go a long way to improving your chance of getting the right product.
Improve your communication to reduce your risk rating
Banks look at the risk rating of each individual borrower when assessing loan applications. It is this risk rating that determines firstly if you can get the loan, but then also both the price they are willing to offer in terms of loan margin, as well as the terms and conditions.
The following steps could help to improve your risk rating in a bank’s eyes:
1. Produce all the required reporting information
You must be able to produce all the required financial information for your bank in a timely manner. This includes copies of your profit/loss statement, your balance sheet, financial records, and so on.
2. Meet the bank’s covenants
It is incredibly important that you continue to meet your bank’s covenants no matter the situation. If you’re facing a drought and don’t believe you’ll be able to meet your covenants or loan conditions, get in touch quickly, provide notice, and form a plan as to how you intend to manage your situation.
3. Be honest
Honesty and transparency are key throughout this process. While it may be tempting to mask the facts about your situation, it is better to be forthcoming than for your bank to find out about it down the track.
4. Provide detailed forecasts
Provide forecasts about the prospects for the current and forthcoming seasons and include what assumptions have gone into the document. When you are making assumptions about next year’s season, many primary producers just assume a return to a ‘bumper year’ to try and even out the drought year(s). Be reasonable about your forecasts! Next year might still be a tough year.
5. Fulfill your tax obligations
Outstanding tax debt is not a good look. If you’ve got a clear position with the ATO, this is good. If you’ve fallen behind in your tax obligations, before you talk to the ATO to set up a payment plan, be upfront with your bank and see if they can assist first. Once you have a payment plan with the ATO, getting further assistance from the bank gets tougher.
Getting a new loan or refinancing
If your existing loan no longer suits you or you need more debt, think through your options before you go straight out to seek a new bank. Here are quick tips to think about before starting this process:
1. Identifying your reasoning
Banks will want to know why you are refinancing. This is another key point where honesty and transparency are of the utmost importance. If the motivation to refinance is because you keep missing your payments, a new bank isn’t going to fix the problem.
2. Forecasting payments
You will need to be able to forecast your ability to meet loan principal and interest payments. If you are increasing your debt, you must be able to prove that you can afford it.
3. Forecasting speed bumps
Your forecast must accommodate potential speed bumps, i.e. an extension of the drought or fluctuations in commodity prices.
4. Investigate grant options
Australia’s state and federal governments have grant and loan options available for farmers facing natural disasters or drought. Consider investigating these before applying to refinance your bank debt.