Only two short years ago, when the hog industry’s recovery started after some tough years Barry Watson, the District Director for the Steinbach District with Farm Credit Canada said the financial world has a role to play in helping facilitate the construction of new hog finishing capacity in western Canada.
Fast forward to the Manitoba Swine Seminar 2019, Watson discussed the topic financing a hog barn, what the producer’s lender wants to know on that initial application form.
Watson said it starts with understanding the size and scope of his existing operation or the size and scope of what he’s proposing to do if starting something new. Next the applicant’s background and history but answered verbally up to a point when the lender needs an understanding of an existing operation if he has one, and some historical financial statements at a minimum of three years of statements, or financials to support the loan application.
If the applicant is a new entrant to a business, this requires projections typically anywhere from one to three years, both a projected income statement.
“So, income and expense projections that show us your profitability and your ability to repay debt, not only today but fully established whether a new entity or expanding an existing one,” he said. “Also a projection on the balance sheet, just in terms of how things will look today. Once we lend the additional money and how the balance sheet looks afterwards, once full production is underway. Finally, a month to month cash flow projection what your income and expense would look. That gives us some assurance that you’ve got the cash that you need to run the operations day to day, and also meet any capital cost investments that you’re making.”
Watson said if the applicant is building a new hog barn, that every time the builder needs a payment, the funds are available to make the payment on time, and still the ability to run the business day-to-day.
The components from the business planning standpoint, it’s important for the lender to understand who the producer is selling his pigs to and what his take is on the market.
“If you were in hog production, or you’re selling weanlings, or you’re selling finished pigs to the processor, what does that look like, what kind of marketing plan do you have, what kind of strategy do you have behind your marketing plan, and do you have a risk management plan,” said Watson. “And are you contracting those hogs in one way, shape or form, to take away a bit of the market risk. Those are all important facets of the business plan.”
He said the lender wants to understand who is helping him with the business, if a larger farm, what kind of people are surrounding him in terms of managing the business daily. What are their roles?
“It helps us understand how you will function daily and whether you can stickhandle your way through the undulations of the market,” he said.
Collateral is a secondary source of payment while the primary source payment is the cash that the business generates.
“We ask for collateral as a backup, sort of a plan B, some assurance that, if their business has issues covering its annual payment obligations, in a worse case, we could sell the assets that are offered as collateral and still get the loan paid,” Watson said. “The majority of cases, the customer can make the payments, and if there’s an issue in making the payments, we’re typically able to find ways to help them to make those payments, and not have to rely on their collateral.”
He said typically, in the agricultural industry and specifically hogs, indeed open farmland is acceptable. But FCC does lots of financing that involves hog barns and hog facilities.
“It’s just a function of arriving at an evaluation that we’re comfortable with, in terms of how much money we’re willing to lend against that asset, and moving forward from there,” said Watson.
He said it is crucial to involve the lender in the conversation as soon as possible and it is important for that potential lender to ask questions that might be good food for thought, in terms of how he might proceed in putting the plan together.
“You don’t need to have a fully baked, written, or prepared plan, to have the conversation with a banker. Let them know that you’re thinking about something, and there might be some good questions and some good conversation that drives some good thought for you, in terms of what you want to do in bringing that plan to fruition,” Watson said. •
— By Harry Siemens