Is Your Business on Shaky Ground? Key Indicators to Watch

MNP publishes its Consumer Debt Index every quarter, which surveys Canadians to see how many would struggle to pay an unexpected $200 expense. This is used as an early warning sign of financial problems, as not having a financial cushion is Stage One of financial stress.   

Having a financial cushion to deal with unexpected events prevents problems from spiraling and causing more problems in the future. Every business is different, but if there are times during the year when you can’t pay an unexpected bill equal to 25% of your annual interest expense on short notice, it’s likely that your finances are stretched too thin.   

Most farmers get through these situations by delaying some other bill payments, but when this happens several times a year, it’s a sign that you may already be in stage three. The solution is often simple at this stage: increase long-term debt and reduce short-term debt to make payments easier to manage. This fix is usually straightforward and easy to get done with your lender.   

In Stage Two, producers end up selling commodities in unfavorable markets, like the fall harvest rush, to meet payment obligations. All farmers need cash flow at harvest or when the calves go to market, but could you afford to wait 60 days before selling if the market conditions aren’t favorable at that time? When farmers are forced to sell because they need cash, no matter the price, they often lose a lot of revenue compared to other farmers.  A lack of financial cushion can force a farmer’s hand, and the lost revenue can’t be recovered. If this sounds like your operation, it may be time to increase your long-term debt levels marginally or sell some assets to be able to maximize your revenue when the opportunities present themselves.   

Stage Three is indicated by selective bill payments which happen when you pay some bills first and delay others. This can lead to bigger problems later. For example, you might pay your fertilizer bill immediately because the supplier won’t sell you more fertilizer, but you put off other bills that seem less urgent. This can lead to more interest charges and late fees, making your cash flow even tighter. If you’re regularly managing your bills this way, you’re running out of time. The solution usually involves increasing your cash flow, either by getting larger long-term loans and paying off short-term loans or selling assets to reduce debt and make payments smaller.   

We hope you never see stage four, because it’s often the last stop before banks start making decisions for you. Stage Four is a crisis equity take-out which happens when a farmer goes to the bank to ask for a new loan to fill a short-term gap in cash flow that can’t be made up any other way. Equity take-outs should only be used in real emergencies. If this happens during a below-average year, it’s a sign the business is in serious trouble. Most farmers can qualify for one equity take-out, many will qualify for two, but very few will qualify for three. Using this option when it’s not an emergency is risky because this funding option will run out very quickly. Adding more debt also increases payments the following year, which increases the likelihood you will need another one in the future.   

Should a farmer be turned down for an emergency equity take-out, it often leads to defaults on one or more bank loans and we’re probably in Stage Five – major defaults. A default is when a bank payment is more than 90 days late. If you have revolving input accounts with major lenders like FCC or Scotia, missing these payments count as defaults.  Once a bank payment is more than 90 days overdue, your relationship with your bank is likely over and you will need to find a new lender in the midst of a difficult situation.     

A major problem we have found at Glengarry is that some farmers are waiting until after default to ask for an equity take-out. This is never a good idea, as banks almost always decline all equity take-out requests once a default happens. It is critical to address any issues before a default occurs. After a default, most farmer accounts are sent to the special credit department, which focuses on recovering any money they can as quickly as possible.    

Glengarry frequently works with clients who have strained relationships with their lenders. Unfortunately, many clients reach out at stage five, when there are few if any options left to fix things. They didn’t realize how serious the situation was until it was too late. The key is to address problems early. Once bank payments are delayed, you’re operating on the edge. If things didn’t go as planned with your bank, Glengarry has helped many clients make a fresh start and build new relationships with lenders who are willing to work with them.   If you’ve experienced some, or all of the warning signs above, we are here to get you back on track. Speak to an account manager anytime at JGinquiry@glengarry.ca.