I read an article last week that focused on the changes brought about by COVID-19 that would become imbedded in society in a post pandemic world.
One element the article focused on was the impact COVID-19 has had on big cities and in particular New York. It compared New York to a forest fire – where the landscape has been totally laid bare, but what we begin to see in time are green shoots, growth, and a different landscape to take the place of the one there before.
It's not a bad analogy for what farming and in particular the dairy sector, has faced in the last 5-6 years.
A major commodity downturn, a significant shift in sentiment from the Banking sector and a seismic shift from wealth creation via capital gains came through the sector like a forest fire.
But what we have seen over the last 3-4 years has been the green shoots, the growth re-imagined and a significant shift in the farming landscape.
That landscape now looks like businesses farming for profit, with clear strategies and risk management plans. It looks like control over operating models, performance and productivity. It looks like clarity around vision and what makes a business successful (and what long-term success looks like). It looks like confidence to invest.
For the Banking sector (as covered by Andrew in this article), it looks like a swing to favour the farming sector, greater confidence to lend and a general mood of positivity that hasn’t been there for a while.
What we have also seen is Banks looking more aggressively to retain the business they want, reward the businesses that have performed well and price for risk on those businesses they see as less attractive.
And it's that desire to retain the better businesses that I want to focus on today.
A case study in presenting a great business to get better interest rates.
At NZAB, we now manage a significant amount of debt exposure across NZ for our clients. That gives us unparalleled visibility on the market.
The case study is a business that has performed strongly in the last 4-5 years. Profitability has been excellent and there is a system that is highly replicable. Debt is being paid down aggressively, via a combination of free cash and the sale of surplus assets. Key risks are well managed and there is strong governance in place.
Overall, an attractive business for the incumbent Bank and the wider market.
With a view to ensuring a sustainable and aligned Banking platform, the business was presented to its existing Bank and the wider market. This was a process done respectfully and openly, but with a clear aim to ensure both a fair deal and that there was absolute confidence in the strategy and support of the businesses future Banking partner.
As a side note - one ancillary benefit of the process was the request for Finance put together becoming a really effective internal document – one covering the businesses key resources, its financial projections, and a full summary of strategy and objectives. A great base document for use at governance level.
The outcome of the process was:
• A significant reduction in interest rate margin – saving the business around $200,000/yr
• Credible secondary Banking options, mitigating refinance risk and future access to capital
• Senior members of the chosen Bank having greater visibility of the business and understanding of its strategy
• Confidence that the ongoing Banking partner has understood and supported the businesses strategy
• Clear accountability on both sides
• A stronger relationship
The last point is an interesting one. Often processes like this can be seen as disruptive or “shopping a business around”. However, if done well, with very clear aims and objectives and deliberate effort put into presenting the business well, the end result should be a much stronger relationship with the Bank and better knowledge of your own business.
So how can you access better terms?
Bank assessed risk grading’s are improving steadily. Increasing profitability, financial statements that show consistent cash surpluses over the last 3-4 years, reduction in debt and stabilised balance sheets mean many farming businesses now present a much more attractive proposition to their own Bank or to the wider market.
That offers up a great opportunity to ensure you are presenting your business to the Bank in a clear and deliberate fashion and getting the deal that you deserve. As we have seen on several occasions recently, the result can be a significant reduction in interest rate and often an improvement in conditions. It should also mean a strong base to take your Banking relationship forward.
These are processes that need professionalism, specialist expertise and time. They need good structure and energy put into presenting the business really well.
Talk to us at NZAB to find out how to get what you deserve.
Give us a call on 0800 NZAB 12 or email info@nzab.co.nz. We’d love to hear from you.