What financial statements say about your farm
The ‘whole farm' approach
For many years, when Canadian farmers borrowed, most did so from the bank they were most accustomed to dealing with. Today, there are many more sources of agricultural financing, such as crop input credit, loans and leasing arranged through machinery and equipment dealers.
Farmers and ranchers with the best credit scores are now in a position to have lending institutions compete for their business. In this environment, some producers choose the best deals and divide their financing among multiple lenders.
Our approach has remained consistent during our 40 years of specialized agriculture lending. When we lend to producers, we like to meet their entire financing needs as much as possible. This enables us to provide a customized package of products serviced by a Farm Finance Specialist. We also typically advise clients against dealing with multiple lenders, but ask that if they do, they keep their RBC account manager in the loop.
Cash flow versus equity
There are two main differences between RBC's approach and those of some
other institutions. One is the difference between cash flow-based lending and
equity-based lending.
If a farm is financing operations out of equity, it's often only a matter of time
before there's a problem. Land prices can stagnate or decrease, interest rates can
rise, and unknowable risks like BSE, avian flu, drought and floods are always out
there somewhere.
We prefer to base lending decisions on the farm's ability to service liabilities from
cash flow, not by raiding the farm's balance sheet every 12 or 24 months. We look
for the producer's ability to absorb 1 to 2 per cent interest rate increases, and for
the ability to weather short-term income fluctuations.
A second difference is that we take a "whole farm" approach. This allows us to ensure
that your term, operating and deposit facilities are individually customized to meet
your needs. Knowing the whole picture, we can also help formulate fall-back plans
to help clients get through those painful but, in the long run, expected downturns
in business. For example, during the BSE and Avian Influenza challenges or even
recent droughts and floods, we at RBC were able to assist our clients by deferring
principal payments to help Canadian producers get through a period of reduced
cash inflows.
True, we're more cautious than some. That's alright. Our experience over the past
40 years shows this is the right approach for our customers and our bank.
If you have any questions about our whole-farm, cash flow-based approach to
lending, I invite you to discuss them with your account manager. On behalf of
RBC Royal Bank, all the best for farm and family in 2008.
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