Before You Sign: What Every Farmer Should Know About Bank Lending Terms

Banks and credit unions are in the business of getting back every dollar you owe them, including the loan amount, interest, fees, and any other costs. When farmers apply for a loan, they usually focus on getting approved, while the bank’s main goal is making sure they get repaid. This can put farmers at a disadvantage, especially if they are in a hurry to obtain credit as they may agree to terms they don’t fully understand. It’s important to be aware of clauses in your agreement that could cause big problems if things go wrong.   

Most farmers aren’t aware that operating loans or lines of credit are typically a type of loan called a ‘demand loan’. This means the bank can ask or ‘demand’ the full amount outstanding at any time, for any reason. Sometimes, banks may use this clause if the bank is having internal financial problems, even if you have never missed a payment. They may even target their best customers in these instances who are more likely to pay quickly.   

Another common clause in your agreements is the Right of Offset (or Set-Off). This allows the bank to take money from your other accounts—like your savings, TFSA, or chequing accounts—to cover missed payments. In a worst-case scenario, if a bank demands payment on a demand loan and you can’t pay right away, they could empty your other accounts, including TFSAs, and then sue you for the remaining amount. If you think this can’t happen, you need to read your loan agreement more carefully.   

The Cross Default Clause is another important issue. If you default on one loan—like a line of credit the bank unexpectedly demands payment for—the bank can classify your other loans as in default even if the payments on those loans are up to date. The Acceleration Clause in your loan agreement then makes all the amounts owed on all your loans due immediately, and the bank could then sue you for everything you owe them. Your lender has the power to do these things but it’s important to understand that the bank will only use these powers in extreme situations as they are in the business of lending money.   

Other clauses include Covenants, which are things you agree to do (positive covenants) or things you agree not to do (negative covenants) during the loan. For example, you might need to submit annual financial statements or maintain insurance coverage. If you break these covenants, even by accident, it could lead to serious consequences, but these clauses frequently get overlooked.   

Permitted Liens or Encumbrances are a type of negative covenant that stops you from using your assets as security for loans from other lenders, except those on the list and within the specified limits. For example, you might have an Advance Payments Program loan secured by your farm’s inventory, and this could take priority over your bank’s charge on that inventory. But if you let other lenders have a claim on your property or exceed the allowed amounts in your agreement, it can be considered a loan default, leading to big problems.   

There is no getting away from these one-sided clauses as all lenders use them to protect their investments.  It is important to be aware of them, understand what could happen, and if necessary, take precautions to protect yourself.  Whomever your lender is, we want you to go into your loan commitments educated and armed with better questions so that you know what you’re signing up for.  If the clauses in your loan agreements are causing you issues, talk to a Glengarry account manager today at JGinquiry@glengarry.ca for a fresh start.