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Cultivate a better ag lending process: 7 best practices

Mary Ellen Biery
August 29, 2022
Read Time: 0 min

Develop better ag lending workflows before demand picks up.

A better ag lending process makes applying smoother for borrowers and can allow efficient ag loan growth without adding a lot of staff.

You might also like this webinar, "Position yourself for high-yielding ag loan growth."

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Efficient processes
Get ready for ag lending growth

Want to harvest growth in the financial institution’s agricultural loan portfolio? Now is the time to plant the seeds by creating a better ag lending process.

A better ag lending process that makes applying smoother for borrowers can also mean a more efficient workflow for bank or credit union staff. It can generate a more profitable group of loans for the financial institution and allow growth without adding a lot of staff.

Efficient and profitable ag lending will be critical as ag loan demand and competition pick up.

Ag industry experts expect global trends, including rising interest rates, geopolitical turmoil, and supply chain disruptions, could reduce net farm income or increase banks’ ability to reprice loans. However, competition may offset some of those benefits.

Financial institution lenders looking to grow lending can develop more competitive ag lending programs now to be ready to scale.

Prioritizing automation
Better ag lending aligns with common goals.

The good news is that many of the improvements ag lenders can make are tied to modernization efforts already underway within the financial institution. They’re also aligned with common institution goals of resetting the cost base and prioritizing automation.

Whether the institution offers an ag operating loan, an ag real estate loan, or a loan for farm equipment, it can create a better ag lending process with these seven best practices:

Provide a mobile experience.

Farmers are mobile, and they are using the Internet to make decisions about their farms and their finances. The most recent Iowa Farm and Rural Life Poll on farmers’ use of communications and computing technologies found in 2020 that 66% of farmers said they use a smartphone, up from 30% in 2014. Forty-one percent use a tablet computer like an iPad that has mobile access to the Internet, up from 19% when the question was first asked in 2014.

chart showing farmers' use of digital technologyEspecially since the pandemic, farmers and people everywhere are relying more on technology, and being able to apply for a loan online, submit documents electronically, and sign the loan papers remotely all result in a more efficient process for busy farmers. Instead of taking time out of the field to visit a branch, they can sit down at night or on a break to fill out as much of the application as they have time for, and then upload their financials as they track them down rather than responding to multiple emails or calls for missing items.

For lenders, this means having an online ag loan application is mandatory. “You have this kind of niche of some older folks finally getting to understand the importance of technology and newcomers expecting it, and if you [as a lender] don’t have it, they’ll find someone that does,” said Rob Newberry during a recent Abrigo webinar on the ag lending outlook.

Limit data entry to a single point.

One benefit of an online ag loan application for financial institutions is that it promotes a better lending process because it streamlines data entry. Instead of a staff member keying in data from a paper application or another system, the ag borrower keys it in initially. After that, the data is used throughout the approval process, transferring to other integrated downstream processes as the credit analysis is conducted, the decision is rendered, and the loan is booked.

In Abrigo’s 2021 Business Lending Process Survey, two-thirds of respondents said their financial institution re-entered the same data point for a loan in another field or system up to five times. If ag lending staff are entering data multiple times, the opportunities for human error are numerous. Manual data entry also means staff spends time on mind-numbing tasks like checking data entry or reports for errors when they could be otherwise cultivating relationships with customers or members.

Using a loan origination system that handles ag loans removes the risk tied to the manual processes of collecting data and eliminates bottlenecks so the institution can provide faster yes or no decisions to borrowers.

Use one system for ag, consumer, and commercial loans.

Inconsistencies in the application of institutional lending policies are a recipe for risk management challenges. If lenders for one line of business spread tax returns into financial statements one way and lenders from another business line do it differently, the reliability and objectivity of loan decisions are questionable. On the other hand, by using the same system for ag loans that the institution uses for other commercial or consumer loans, examiners know spreads and financial ratios are consistent.

Staff also benefit from a centralized system that houses data and documents for multiple loan types. They spend less time switching software applications and more time reviewing complex borrower applications.

See projections for the ag market and tips for lenders in "The Ag Lender's Survival Guide"

download whitepaper

Streamline document collection and management.

Tax returns, financials, machinery inventory worksheets, production histories, deposit account information — originating ag loans means collecting a lot of ag borrower data.  Again, consistency among lenders and analysts is critical. However, inconsistency, inefficiency, and even security issues with customer data are in play when staff must use paper files, email transmission, and disconnected systems.

A better ag lending system centralizes and automates the collection of vital documents. It uses workflow applications with ticklers and email reminders to alert staff and borrowers of missing information.

Streamlined document collection and management can also help financial institutions proactively monitor existing ag borrowers, which is important as stimulus money wanes and global conditions affect commodity prices. Loan reviewers can easily pull up financials and request updated data or review collateral to ensure the financial institution’s interests are protected.

Increase accuracy of credit analysis.

Since many farmers and ranchers have other sources of income besides farming, lenders need to incorporate these sources accurately as they calculate critical financial ratios, such as the debt-service coverage ratio. A better ag lending process uses automation to consolidate financial statements from multiple parties or entities into one view. Rather than spending hours to create a consolidated income statement and balance sheet as well as a global cash flow analysis, lending and credit staff can do it instantaneously with the push of a button while making necessary adjustments.

Automation for consolidated ag financial statements also promotes consistency in lending decisions.

Streamline the decision process.

One of the most time-consuming components of ag loan approvals can be developing market- or deal-specific credit presentations. When ag lenders use homegrown systems relying on spreadsheets and Word documents, the loan presentation must be cobbled together, and data is housed outside the core system.

A better ag lending process uses automation that offers ag-specific, customizable templates for credit presentations. With data flowing into the presentation from the borrower application and credit analysis, presenters can use the time savings to review the information and address any potential questions. Loan committees also gain efficiency by seeing a standard format from loan to loan.

Ultimately, the ag borrower benefits by having a faster decision.

Feed ag loan data automatically to other downstream processes.

A major challenge of ag lending systems that rely on spreadsheets and paper files is that once loans are approved, relevant data for downstream processes is scattered throughout the institution. Data for stress testing or calculating the allowance for credit losses might be spread across multiple files or systems, so the staff must spend time requesting and collecting it. Again, with multiple data collection and data entry points, the opportunity for error arises.

During Abrigo’s recent ag lending webinar, only 9% of attendees said all critical ag loan data collected for credit decisions is available in one system for downstream processes. Having the data in one system provides not only better ag lending reporting capabilities but also more efficient and accurate stress testing and allowance processes.

Planning for growth
Implement changes ahead of demand increase

As farming does with the weather and the seasons, the ag lending industry ebbs and flows with the farmers’ changing fortunes. When farm income falls, ag lending demand increases. Financial institutions are understandably watchful of the U.S. economy and may think it’s too early to consider ag lending process improvements, given current ag loan demand.

Even so, many banks and credit unions not long ago were too busy responding to the flood of loan demand from the Paycheck Protection Program (PPP) to implement operational changes leaders have known are vital for their institutions’ future survival and success.

The PPP is a good reminder that lending conditions, like the weather, can change quickly.

 

Provide ag borrowers a better experience and grow the portfolio more efficiently.

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About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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