We all take life’s little certainties for granted.  Availability of food on any given day, access to education to take on life’s challenges, even the morning sun lifting an autumn fog off the freshly sown paddocks.

Many farmers also naturally take for granted their ability to approach a bank and seek finance approval to move the farming business forward.  This expectation is founded on a belief system where they have never defaulted on a loan in their history, their loan record is impeccable and hence all funding requests should be granted, right?  Wrong. Unfortunately.

Scribed on the balance sheet is a yardstick of a life’s long work.  Acreage, plant & equipment, livestock inventory, superannuation etc.  The countermeasure are the liabilities; trade finance, equipment finance, term loans to purchase the second farm.  The list on each side of the ledger can be long and impressive.

Balance Sheet Amiss

What is invisible to the balance sheet but is deemed one of the most critical assets (or liability in some cases) is the business’ credit risk profile.  This is the score card that the banks keep a measure on as a litmus test to the viability and bankability of the business.  Keep the score card clean and like the sun rising in the morning, liquidity is available.  Tip the scales and dip below the minimum thresh hold and like a drought on a sun-baked dam, the liquidity dries up.

This intangible asset, the most crucial asset of all businesses is not static.  It is largely influenced by the decisions been made within the business, the external economics playing out within the industry and the banks shifting policy and appetite like that of a sand dune in the Western Desert of Egypt.

It is to be nurtured like an endangered species and unleashed to consign a farming business towards its long-term goals.

The Power of One (Intangible Asset)

By understanding how credit risk is measured, a farming business can permit their business access to greater opportunities by accessing cheaper debt capital on more flexible terms whilst avoiding decisions that can cause a financial grenade to go off and create collateral (and hopefully not fatal) damage to the business.

This knowledge is empowering, and the results are very tangible indeed.

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