One lender or more?

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Decades ago, I was a loan officer for an agricultural lending institution. One of the practices of this lender was to strongly encourage (require) borrowers not to split their lines of credit across multiple lenders. Instead, the borrowers were encouraged to do all of their borrowing through the institution I represented.

The reason given to borrowers was that this single-lender practice ensured that they would get clear and consistent advice on financing and investments and there would be no confusion as to what assets they were pledging as loan collateral.

In reality, this single-lender arrangement was generally intended to discourage farmer borrowers from shopping around for favorable interest rates and loan terms from other agricultural lenders.

If one is good ...

Using one lender as the primary source of credit, particularly operating credit, is generally a good business practice for dairy producers and other farmers. Dealing with a single lender increases loan officers’ familiarity with your operation’s credit history and builds the communication channels that may be needed when farmers and lenders are trying to get through some trying financial times — like the last couple of years.

This familiarity and long-term history can, many times, justify some lower interest rates on loans or some permissive repayment terms.

... two or more may be better

Just as there are some benefits from dealing with a single lender, there are also benefits from splitting lines of credit across multiple lenders. The most likely benefit is that it forces lenders to compete for your business by offering the best possible interest rates and terms on loans.

Doing business with multiple lenders can also expose you to different philosophies regarding credit and investments. This exposure to alternative views can help you understand there is no one right or wrong answer when it comes to finance.

Even if you cannot get any breaks on interest rates, repayment terms, collateral and so on, it still may be advisable to start splitting up your credit business across multiple lenders because this strategy can help reduce your risks.

Using on a single lender for credit works just fine when that lending institution operates as expected. But what happens when it is suddenly and unexpectedly announced that regulators are shutting down the lending institution and putting it under the control of another lending institution?

The credit that is already outstanding will not suddenly be called due, but there could be some problems gaining new credit in a timely manner. This delay in accessing credit could certainly disrupt the day-to-day operations of your business and could jeopardize some planned improvements or necessary upgrades, like the repair of a milking parlor.

Spread your risk

As a matter of practice, it makes sense for producers to have lines of credit established with two or three lenders. The point is not to borrower money from one lender when another one rejects a credit request. Rather, it is to make sure needed credit will be available in the rare case that a lender is shut down by regulators and put into receivership.

Fortunately, it is very uncommon for financial institutions to fail in this country and, even when they do, there are rarely major problems stemming from the closing of the institution. Depositors generally get all of their funds, and borrowers just make their payments on their loans to the new owners of the financial institution. So, after a short period of time, things generally get back to the way they were.

But the history, trust and channels of communication that farm borrowers built with the previous lending institution are all lost.

However, these are not totally lost if you have been building relationships/histories with other lenders. This is why you should be willing to split some of your business across lenders.

Bruce Jones is a professor of farm management at the University of Wisconsin-Madison.



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