Agricultural lenders might not see much in “the field” in terms of prospects for ag loan growth this year. But financial institutions cultivating better lending workflows now will be able to harvest the benefits as conditions improve. They’ll have efficient and more profitable ag lending to service healthy ag borrowers.
Cultivate a better ag lending process: 7 best practices
April 2, 2024
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Streamline ag lending processes now to grow later.
Learn what banks and credit unions can do while ag borrower demand is lower to prepare for growth without adding a lot of staff.
Takeaway 1
Demand for non-real-estate farm borrowing turned higher in 4Q2023 but remains low, making this a good time to improve the ag lending process.
Takeaway 2
Best practices for efficient ag lending include incorporating an online ag loan application, limited data entry, and a centralized system .
Takeaway 3
Better ag lending workflows streamline document collection and management and increase credit analysis accuracy.
Efficient processes
Get ready for ag lending growth
Recent pick-up in demand
Trends affecting ag lending
The Fed’s Chicago district reported recently that demand for non-real-estate farm borrowing turned around in the fourth quarter of 2023, coming in higher than a year earlier for the first time in 14 quarters (since 2Q 2020).
Inflation is expected to continue boosting ag operating and living expenses at the same time it brings more pressure on farmers’ ability to service existing debt or qualify for a new loan. With most of the excess liquidity from 2020 government payments now spent and much higher interest rates, farm financial positions could see additional pressure in 2024 and beyond.
A snapshot of the ag lending environment shows:
- Chicago Fed financial institutions in January reported having less funds available for ag lending than in the same quarter a year earlier -- for the third quarter in a row.
- Interest rates for farm operating loans and for farm real estate loans are the highest they’ve been since late 2009, according to the district.
- In the St. Louis Fed district, rates are the highest since recording began in 2012.
- Finally, many farmers who rent their farmland in some parts of the country are reporting ag land rental rate increases already in 2024 after seeing increases last year, too.
“Looking ahead, for farmers that have used cash reserves to reduce loan levels, elevated cost pressures and lower prices across most ag commodities could increase demand for ag lending,” Chris Summers, a Senior Risk Specialist at the Kansas City Fed, wrote recently. However, the average maturity of all non-real estate bank loans made to farmers was just over 15 months as of 3Q2023. Loans made for operating expenses were under one year in duration. Given such short durations, he said, “higher interest rates could create pressure on repayment capacity and overall ag conditions.”
Ready to pivot?
Why focus on ag lending processes now?
Financial institutions themselves are grappling with managing higher interest rates and the effects of inflation. The most recent quarter showed continued pressure on net income from higher deposit and credit costs, as well as increased provision expenses. They’ve also had to weigh extending credit with liquidity management needs, especially as depositors chase higher returns.
So why should ag banks and credit unions focus on improving workflows now? As interest rates begin to drop and liquidity pressures ease, profitable loan growth will again become a top priority for many banks and credit unions. Lenders will still need to be selective and efficient in originating ag loans to ensure the highest return on their limited liquidity. But streamlining ag lending processes during the lending lull can help financial institutions serve ag communities’ capital needs when the time is right.
Institutions only need to look back to the Paycheck Protection Program and community financial institutions’ response for a reminder that being ready to pivot and ramp up lending can yield growth and more opportunities to serve the local community. Community financial institutions that invested more in technology before the pandemic hit had higher loan and deposit increases than those with less investment.
The same goes for reviewing current strategies and activities tied to ag operating loans, ag real estate loans, and loans for farm equipment. Implementing technology or process changes is always easier ahead of stronger demand. Improvements will provide more opportunities to grow ag lending profitably and serve local farmers.
Better service, efficiency
Ag lending best practices
Below are seven best practices ag lenders can incorporate while business is slower. Each contributes to a loan process that pleases farm borrowers and enables the institution’s profitable portfolio expansion. Indeed, several ag lending best practices included here complement modernization efforts already underway within many financial institutions.
Provide a mobile experience.
Farmers are mobile, and many routinely use the Internet to make decisions about their farms and finances. More than 8 in 10 farmers have a smartphone, and nearly 7 in 10 have a laptop or desktop computer, according to the USDA’s latest Technology Use Survey.
This means having an online ag loan application is mandatory. “You have this kind of niche of some older folks finally getting to understand the importance of technology and newcomers expecting it, and if you [as a lender] don’t have it, they’ll find someone that does,” Abrigo Senior Consultant Rob Newberry said.
Give busy farmers the option to apply for a loan online, submit documents electronically, and sign the loan papers remotely and at their convenience. Rather than taking time out of the field to visit a branch, farmers can fill out as much of a digital loan application as they have time for during a break or at night. They can upload the required documents as they track them down.
The lending and credit team will be able to focus on structuring and analyzing the loan rather than on contacting the borrower for missing items. Farmers will appreciate not having to receive or respond to additional requests repeatedly, and they’ll like the faster decision.
Limit data entry.
Another way an online ag loan application promotes a better lending process is that it streamlines data entry. The ag borrower data is ported from the application and throughout the underwriting and approval process. This simplified process avoids having staff key in data from a paper application or other records only to re-enter the same data point in another field or system multiple times. It also reduces the chances of errors.
In Abrigo’s latest Business Lending Process Survey, two-thirds of respondents said their financial institution re-entered the same data point for a loan in another field or system up to five times. Manual data entry also means staff spends time on mind-numbing tasks like checking data entry or reports for errors when they could be otherwise cultivating relationships with customers or members.
Using ag lending software that handles ag loans removes the risk tied to the manual processes of collecting data and eliminates bottlenecks so the institution can provide faster yes or no decisions to borrowers.
Use the same system for ag, consumer, and commercial loans.
Inconsistencies in how different lenders apply institutional lending policies to various loan products can be a recipe for risk management challenges. If lenders for one line of business spread tax returns into financial statements one way and lenders from another business line do it differently, then the reliability and objectivity of loan decisions can be questioned. Using one system that handles ag loans as well as other commercial or consumer loans ensures that spreads and financial ratios are consistent for examiners and risk management.
Staff also benefit from a centralized system housing data and documents for multiple loan types. They spend less time switching software applications and more time reviewing complex borrower applications. Anyone involved in the application can determine the loan status without emailing or calling others.
Some ag lenders will have new reporting requirements under the CFPB's small business lending data rule. Learn more about the requirements.
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Streamline document collection and management.
Tax returns, financials, machinery inventory worksheets, production histories, deposit account information — originating ag loans means collecting a lot of ag borrower data. However, inconsistency, inefficiency, and even security issues with customer data can arise when staff use paper files, email transmission, and disconnected systems.
Better farm lending centralizes and automates the collection of vital documents. It uses workflow applications with ticklers and email reminders to keep the information flowing and alert staff of next steps. Streamlined document collection and management also help financial institutions proactively monitor ag borrowers, which is vital as farmers’ financial conditions change rapidly. Automated ag lending processes alert borrowers to send information needed to monitor the loan after closing, such as annual financials. Independent loan reviewers will be able to quickly access financials and review collateral to ensure the financial institution’s interests are protected.
Standardize global cash flow analysis.
Since many farmers and ranchers have other sources of income besides farming, lenders need to incorporate these sources accurately as they calculate the debt-service coverage ratio and other critical financial inputs. As a result, some lenders spend hours creating consolidated financial statements and a global cash flow analysis. A better ag lending strategy uses automation to consolidate financial statements from multiple parties or entities into one view and produce statements with the necessary adjustments instantaneously. Again, the lender is promoting consistent decisions with an automated process.
Use ag-specific, customizable credit memo templates.
One of the most time-consuming components of ag loan approvals can be developing market- or deal-specific credit presentations. When ag lenders use in-house systems based on spreadsheets and Word documents, the loan presentation is often cobbled together from data in multiple places. Checking documents for typos alone chews up valuable time that could provide a faster decision.
An improved ag lending process uses automation and ag-specific, customizable templates for credit presentations. Data flows into the presentation from the borrower application and credit analysis. Presenters can use those time savings to review the information and address any potential questions. Loan committees also gain efficiency by seeing a standard format from loan to loan.
Feed ag loan data to allowance calculations.
A significant challenge of ag lending systems that rely on spreadsheets and paper files is that once loans are approved, data needed for downstream processes is scattered throughout the institution. Data for calculating the allowance for credit losses might be in one file or system, while data used for stress testing might be in another. During a recent Abrigo ag lending webinar, only 9% of attendees said all critical ag loan data collected for credit decisions is available in one system for downstream processes.
As noted earlier, multiple data collection and data entry points increase opportunities for errors and hamper efficiency. Having the data in one system provides better ag lending reporting capabilities and more efficient and accurate stress testing and allowance processes.
Planning for growth
Implement changes ahead of increased demand
Farmers’ fortunes ebb and flow in the same way seasons do. Likewise, demand and appetite for ag lending also fluctuate. Given current ag loan demand and financial institution liquidity, banks and credit unions are understandably watchful of the U.S. economy. Some may think that making ag lending process improvements isn’t worth the effort or resources.
But remember: the time to change a tire with a slow leak isn’t when the tractor is racing against stormy weather.
Applying the ag lending best practices here will create a smoother application process for borrowers and a more efficient workflow for bank or credit union staff. Ultimately, that means a more profitable group of loans and happier customers or members.
Provide ag borrowers a better experience and grow the portfolio more efficiently.
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