Low Rates Spell Opportunity and Risk
Those same historically low interest rates that can get a borrower in trouble are also an opportunity, noted Mellencamp, one that is welcome, given the demands of the market. "The higher inventory financing needs of ag retailers requires them to have larger working capital positions to support increased borrowing levels," said Mellencamp. "Any business with long-term debt on a floating interest rate should be looking at fixing the interest rate at today's low rates."
"For those that currently have debt, now is the time to explore opportunities to 'hedge' interest rates by seeking fixed rate loan products," said Blanchfield. "Banks have more than ample liquidity to enable them to accommodate their customers' needs."
LOOKING FOR LENDING OPPORTUNITIES
As he notes with farmers, low interest rates and “good times” are no reason to max out credit lines. "Treat borrowed capital for what it is, a way for a business to acquire assets when needed and to structure repayments in a way that best matches the cash flow of the business," advised Blanchfield. "Low rates simply mean there is an opportunity to take on additional debt if needed and the additional debt makes business sense to the business and its banker."
Although credit standards remain high, the bankers insisted that lenders are looking for lending opportunities. Mellencamp noted that credit fundamentals really haven't changed, even if the amounts being borrowed have increased with business growth and inventory value.
"Management has to have strong risk management practices in place to shield the company from inventory price risk," he said. "The decline in fertilizer prices from 2008 to 2009 caused significant losses for agricultural retailers and was a 'wake-up call' to change risk management practices."
Lending continues to be done the old fashioned way with a solid business plan, added Blanchfield. "Make it easy for your banker to say yes, by showing him or her you've done your homework," he said. "Bankers are looking for solid past performance, a business plan that covers how the new borrowing will be repaid, a track record of accomplishment, a pattern of being successful with past borrowing and the ability to handle an increased level of business complexity if the loan is for expansion."