10 Bank Red Flags
- Grant Wiese
- Oct 6
- 5 min read
SW Financial Literacy
10 Bank Red Flags
There are a lot of good banks and ag lenders out there. We rely on them and need their expertise.
There are good banks with bad lenders. A local community lender who has stood strong and supported ag for a long time, but they haven’t been able to find a quality lender to work with the ag portfolio.
There are bad banks with good lenders. The bank doesn’t have the best practices or management, but you are working with a lender who knows their stuff and who you trust.
Hopefully, you aren’t with a bad bank and bad lender.
Here are 10 red flags you should be on the lookout for when it comes to getting your farm loans. If you see any of these in your operation, either you may be in financial trouble or there are probably other banks/lenders out there that could do a better job for you.
They don’t give you a copy of your balance sheet.
· This makes it harder for any other bank to approve your credit if you don’t have historical information. If your current bank kicks you out, you won’t have the documentation you need to get financed by anyone else. Also, if you are locked in with your bank, they can run your loans at a higher interest rate because you have forfeited some ability to shop around their services.
Operating note has a hard maturity date and must be paid down to $0 before being renewed.
· It amazes me that some banks still do business this way. Your operating loan was put on February 1, so every year your note must be paid down to $0 by January 31. This forces operations to sell grain before they want, and wait with prepaying any expenses at discounts (or for tax purposes) until after the new note has been made. This lack of flexibility costs you real dollars.
Over-willingly term out operating losses.
· To piggyback off the last bullet point, if the farmer doesn’t get their operating note paid down to $0 by maturity date, the bank simply terms out whatever is left on a 5 year note to be paid back over time. This is a terrible idea, and banks should almost never recommend this! Let alone have it be regular practice for any year with losses. This isn’t addressing the root problem with cash flow issues within the operation and makes your cash flow worse moving forward with additional debt payments to service. Not to mention the extra interest that must be paid…. to the bank!
All collateral, including real estate, is tied up to secure your operating note.
· Why are banks offering to term out operating losses as soon as you have them? They have tied up all your collateral to secure your operating note, including all your farm ground! If you are in a strong financial position, rarely is dirt needed to secure an operating note. You want the bank to have as few of your assets as needed, not them taking a lien on every inch of dirt that you own. By doing this, they may not feel a need to be responsible with how much money they are lending to you because the bank will always end up whole, regardless of how big a hole you dig for yourself. With all your assets tied up as collateral, this limits your ability to go to any other lender when the bank shuts you off or moves your interest rates higher.
5-year balloon payment on real estate notes.
· Many banks have limits for what they can offer on a real estate note, so this may not necessarily be a red flag. But if given the choice, I avoid balloon structures where you must reapply and get reapproved for financing to continue having a note against your real estate. The security of a longer-term note helps avoid the need to reapply when you might be at your weakest point financially while negotiating terms.
You are kicked out of the bank due to bank owners’ need for the bank to ‘prune’ their accounts during a recession. But don’t worry, it is nothing personal.
· Obviously if you are being notified to find a new bank because the bank is needing to prune accounts, this is not a good sign. I’ve had several people share this with me and they didn’t realize they were in a horrible situation financially. They believed when the bank said it was nothing personal, just a command from upstairs. If the bank is kicking you out, you may be difficult to work with or near bankruptcy.
No coaching or feedback on your financial position.
· If you don’t get financial feedback, you don’t know if the bank views you to be in a stressed position until they tell you, “No, go find a new lender.” This is how farmers end up with 18% interest rate operating notes from high risk lenders.
Lending on name and reputation, not ability.
· They write notes to the family name without going over your financials. They will lend you to bankruptcy, where there will be nothing left for you to retire with or pass down to the next generation.
Not comparing your balance sheet vs. cash flow projection when making loan decisions.
· If all loan decisions are made off your balance sheet alone, they are collateral lenders and not interested in if you are making money. The cash flow projection is what you as a farmer need to show as positive and making money to stay in business. If your bank doesn’t care about this, they know they have enough collateral to get paid back when things go south.
Not ag friendly
· Fewer and fewer banks have lenders or leadership that understand agriculture. As a result, they don’t feel comfortable putting these loans on their books when they can’t explain what is happening to their board of directors or credit committee. Some banks that were created for ag finance no longer see a future in lending to the ag industry.
As a farmer it is hard to tell if these red flags are coming up because you are in a compromised financial position or if the bank just doesn’t have the best practices.
HERE IS A HINT: If you aren’t getting coaching to understand your financials or getting ideas from your lender to potentially improve your position, it is time to look elsewhere.
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Have a great week!
Grant
