Members of UMB Bank’s agribusiness division possess a deep knowledge of the unique challenges and needs of nursery growers. Bill Watson, director of Agribusiness Credit for UMB Bank, provides insight into how growers and their banking partners can shape and strengthen a beneficial partnership.
Wholesale nurseries have financial needs that other industries may not experience. Describe some of those unique needs that would impact a nursery’s relationship with banks.
Nurseries certainly have some unique issues and it’s not unusual for the nursery industry to seem alien to some bankers. And growers may struggle to explain to bankers what their business is all about.
Collateral evaluations of nursery businesses are challenging for bankers to understand. Growers have collateral that is alive, and therefore can die, which may make it difficult for collateral to increase in value as banks lend against those assets.
Understanding a nursery’s cash cycle and the industry’s seasonality is important. A nursery’s seasonality is heavily related to the spring and summer months, which drive both the sales cycle and cash flow. From a bank’s perspective, they initially see that a grower’s P&L statement shows losses for the first two or three months of year, but profitability increases in March or April and continues through the summer before sales drop off again and expenses continue.
Another unique need is the ability to bring new plants to market. Banks must understand how product development helps growers sell out of inventory.
What are the keys to a solid and successful relationship between a grower and their financial institution?
At UMB, it’s key that when we meet a prospect for the first time, we listen and don’t assume their objectives or dreams. We take time to understand their plans.
Two-way communication is critical. The way you build a relationship is with communication — be honest and in sync. Some of those conversations can be difficult, but they’re important to achieve the customer’s objectives.
How often should growers and their financial institutions communicate?
Growers and bankers should meet annually to discuss their financial plan, working capital and capital needs. If the plan is on track, a quarterly discussion is sufficient. But if things are off track — perhaps because sales are booming or sales aren’t going as planned — those meetings need to increase in frequency. Growers must be willing to communicate to the bank when things change.
What topics should growers discuss with their banker?
Growers should be discussing capital expenditures, such as new growing spaces or new irrigation equipment, for example. Banks also should talk candidly about customer concentration and making sure all a grower’s eggs aren’t in one basket.
Banks and growers need to discuss leverage, which gives you opportunity to expand the operation, but it also creates risk. Talk about a target leverage ratio and what that should look like during the lifecycle of the business.
There are two reasons it’s important for growers and bankers to have a Plan B in case of an economic downturn. They’ll know what to expect, and they’ve already thought about how to execute the plan.
What should nursery growers understand about cash flow?
Cash flow is critical for paying vendors, suppliers and their bank — so it’s critical for us to make sure our customers understand their own financials. We ask if they’re having their numbers reviewed by a CPA. We talk about liquidity and how much money they can spend and still be within the parameters of their cash flow needs. We also perform a cash flow analysis and share that with our customers, which can be a wonderful management tool.
What is a bank’s role in helping growers better manage profits?
The bank is another pair of eyes looking at the income statement and finding ways to increase margins in other areas.