Finding financing

When asked what keeps them up at night, growers’ responses range across the board from weather to shipping costs to stress to government regulations. But a common response is also not having enough money.

As a result of the economic downturn, in recent years, banks have tightened up their lending. As a result, many growers haven’t been able to get the loans they need for capital improvements and expansions so they’ve put off maintenance projects and much-needed equipment and structure upgrades because of a lack of funds.

But it’s not just been a tightening on the banks’ end. Many growers have also been hesitant to take on loans with the uncertainty of the economy.

“This industry has really struggled with the economic downturn and people just tightening their belts,” says Michael Schrey, regional manager for AgChoice Farm Credit, an agricultural credit association serving Pennsylvania and part of West Virginia.

Other banks have seen the same thing.

“People have largely put off greenhouse construction in recent years to see how the recession would affect the economy in their sales, but we expect to see more of that going forward,” says Barry Sturdivant, senior vice president and manager of the nursery/greenhouse agribusiness center for Bank of the West.

Our research here at Greenhouse Management supports that as well. In our July issue we featured the 2012 Structures Report, which indicated that while about the same amount of people were planning expansions this year compared to last year, the budgets for upgrades were increasing, with those budgeting for upgrades of more than $200,000 jumping from 3.6 percent last year to 20 percent this year. Also noteworthy in that research was that growers were planning larger additions than in the past year.

Sturdivant says growers also come in needing lines of credit to make it through the winter and spring until cash flow comes in again. This will be increasingly important moving forward as manufacturers and suppliers have, in the past, lengthened payment terms to help growers, but they’re feeling the pinch now and starting to shorten those terms again.

So with needing money to get through until the cash starts coming in again the next season, and with repairs and maintenance that really needs to be done, you clearly need money. On the surface, it could seem hopeless, but statistics are starting to show there’s hope. Sturdivant says that Bank of the West’s greenhouse and nursery lending this year has been up about 10 percent over last year. Additionally, a study released last month by PayNet indicated that small business lending rose 12 percent in May from April’s levels, which was the largest increase since June 2009 when the economy was trying to claw its way out of the recession.

“Banks are trying to find good customers to lend to,” Sturdivant says. “In our industry at the moment, that’s primarily greenhouse operations that have survived the recession in good shape. Nursery operations that have survived will also be attractive to banks, but they’re still emerging from the recession since they depend more upon housing than commercial real estate development. Banks are hungry for assets, and they’re looking for good, credit-worthy customers.”

But what does that actually mean? What does a bank want to see when you go in to ask for money? Greenhouse Management spoke with Sturdivant and Schrey about what they look for when you come in for a loan, how to best position your business to increase your chances of getting the money you need, and how to build a better partnership with your banker.

Know the key factors
When you go in for a loan, there are a few key factors the bank will look at. The first is historical performance.

“Have they shown the ability to be profitable?” Sturdivant says. “If not, is there a reason for it? In this industry, there are acts of God, say bad spring weather, that can impact earnings that are outside the realm of management. We look for the ability to perform and show profitable operations.”

Whether you like it or not, how your greenhouse operations have done over the past few years is really important to the bank. Yes, the weather may have been bad in previous years. Yes, the recession impacted how many flowers your customers were ordering. But while there are a lot of good reasons for why business may have been down, you have to remember that from a bank’s perspective, it’s business, and they don’t want to take chances on loans that could send them right back to the over-lending problem that started the recession, so too many reasons for low performance could hurt you.

Next they’ll look to see if they have good liquidity positions — which basically means do you have working capital.

“Are they able to pay their bills on a timely basis?” Sturdivant says. “We also look at cash flow. Do they have the ability to service term debt?”

Then they look at collateral and whether it’s a reasonable debt to worth ratio.

“Debt to worth ratio just indicated who owns the company,” Sturdivant says. “We like to make sure there are customers that have at risk capital. That makes bankers feel better about lending to them if they have skin in the game, and they have something to lose. That indicates they will stay on board and manage the company through difficult times.”

They’ll also look at your business plan and what the goals are of the project for which you’re looking for financing.

“The determining factors are really looking at the business plan and the long-term results of this investment,” Schrey says. “Is the return that the customer is projecting consistent with the risk they’re going to take to do the project? What’s the risk-reward ratio? Is the risk we’re taking worth the reward we’re going to get on the back end?”

Come prepared
When you go into the bank, it’s best to be prepared with all the documents and information the bank will need to consider your loan request.

“First of all, they need to bring in the historic information that shows how they performed in the past,” Sturdivant says.

Be completely honest and transparent.

“In working with the bank, communication is everything,” Sturdivant says. “Be open and honest about your strengths and weaknesses, have prepared good financial information, which usually means a reviewed financial statement prepared by an accountant.”

Each bank’s requirements are different, so you’ll need to know if a reviewed statement is sufficient or if you will need a full audit.

“We really need a third-party assessment from a CPA,” Sturdivant says.

This part may keep a lot of you from moving forward, but don’t let a bad year or two keep you from talking to your bank.

“If they can show a profitable year and explain why the prior years were break-even or showing a loss, as long as there’s an explanation for that, we still want to talk to them,” Sturdivant says.

He says that if you have a strong balance sheet, and you’re able to absorb some of those losses and the reason for the loss is something outside your control, you might still have a good case.

When Sturdivant can’t help is when there’s a long history of lawsuits or a weak balance sheet.

“It can be difficult to approve increases to lines of credit for people that have no working capital,” he says. “In other words, when we make an increase to lines of credit, we need to make sure that customer has some of their own cash. … It’s become more difficult to ask banks to provide 100 percent of that financing.”

You also need to bring in an overview of your business. It can even be handwritten, but it needs to address what the business is, who you sell to and offer an honest self-appraisal of the business’ strengths and weaknesses and why it will continue to prosper in the future.

“Just having the customer think through that process should help us ask better questions and make sure we’ve really thought through any risks and rewards of any projects,” Schrey says.

Also be able to speak intelligently about your business.

“Be prepared to talk about your customer base, about your company’s strengths and weaknesses, about why you’re successful, and about what your potential weaknesses or concerns are,” Sturdivant says.

You’ll also want to address the competition.

“Who are your main competitors? Why are you better positioned to deliver this product to the market than your competitors?” Schrey says.

If you don’t have a business plan, you should create one, and it’s helpful to bring in your current year’s sales as well as business projections for the coming year and plans for beyond that. Be able to also articulate how the project you’re requesting money for will generate increased revenue or profit or both and how much it will generate for the business.

Schrey says, “Those are the kinds of questions we’re going to get to as we start to evaluate a project.”

Build a partnership
In an ideal world, your bank should be more than just a way to get money to do what your business wants to do. Instead, it should be a partnership, and building a partnership requires a few keys.

“Recognize that your bank really should be and wants to be a good natural partner — emphasis on the word partner,” Sturdivant says. “It’s beneficial to both parties to have great communication with each other.”

Banks can help you get on the right track if you’re not there now. For example, by sharing your plans and goals with your banker, he or she can help you identify how much profit you need to be able to achieve those things. Then you can go back and determine a plan for how to get to that level.

“They can figure out how to boost themselves a little bit or to gain some efficiency, cut costs there, but they need to have a goal,” Sturdivant says.

It’s also helpful if you just have general questions or are considering future plans.

“Any grower needs to have that relationship with a banker, whether they’re doing business with them or not — they need a resource,” Sturdivant says.

Meet with your bank on an annual basis at least to touch base about your financial performance.

“If we’re doing an annual budget, which is something that not every business does but would be a good idea to do, did we meet or exceed that budget at the end of the year?” Schrey says.

This is particularly helpful because if you have a strong relationship with your bank, it makes it easier when you do need money.

“Those ongoing dialogues do make the time when you do need to borrow money go much easier because we’re not going back and saying, ‘We haven’t done anything in two or three years, so we need to fill in that gap of information,” Schrey says.

On top of that, even though banks want good customers to loan to, it’s still a tough environment, so building a strong relationship with your banker will only help your business.

“Even though banks are open for business, and they want to find new borrowers, this is a very regulated environment that we’re in right now, and banks are very concerned about compliance, so it’s not quite as easy as it used to be,” Sturdivant says. “Greenhouse growers need to establish a good rapport with someone so they won’t have surprises. They need to be communicating with someone.”