There is no doubt that access to financing is incredibly important for agribusinesses. This is the first in a series of articles designed to provide you with an insight into how your bank assesses you and your business.
To explain how your bank makes its assessment, a matrix that has been specifically tailored for Agribusiness is provided below. This matrix is useful to identify the sector in which you currently sit.
Whilst banks take many factors into consideration in assessing your request for additional funding, either for the acquisition of new properties, extension of facilities, or for carrying on finance, two most important factors are detailed below. This matrix is a combination of your equity position and your viability as measured by the level of interest cover.
Click here to view table.
If you sit in position A, you have high levels of equity (greater than 50%) and acceptable interest cover of better than 1.5 times. If your asset values and therefore the bank security have declined, lower equity levels will push you into position B. However if your viability and therefore your ability to service your bank facilities is still strong you can restore equity over time through applying surplus cash to debt reduction.
Position C is potentially very dangerous and applies if you still have reasonable equity. However, declining viability without contingency plans is placing your business at risk. This could lead to existing equity being eroded. The bank will see this and will expect you to have plans to avoid landing in position D. This is clearly the worst position with low or no equity and poor viability with diminished serviceability capability. Many producers have found themselves here. If you believe you are already in, or approaching D position, you should have a plan.
Ideally, you should also know your financial position holding up to date details of your trading performance, be in regular communication with your relationship manager at the bank and seek professional assistance before it’s too late.