I feel like there was some confusion during renewal season this year. One portion of that confusion stemmed from rates changing. You may have showed up to sign your LOC renewal to find that your effective rate would be 6%+. Prime plus .5-1.50 is the range most people are falling in. I know you are thinking – “Ashley, that’s a heck of a range.” Don’t worry I will be getting into that, so don’t judge me just yet. I’m going to touch on the wide range of rates, explain the banker’s side, touch on risk based pricing, and finally discuss what to expect going forward.
First let’s talk about that range and I’m briefly going to go ahead and knock out risk based pricing here while I’m at it. This year I have talked to bankers who have offered prime minus .25 (5.25) all the way to prime plus 2.00 (7.50). Why? A few things. First of those is risk based pricing. If an operation has had a few less than break even years and their financial ratios aren’t the strongest….they may not get offered the same rate as a farm that had solid net incomes and have strong ratios. I know that some of the things that caused the down years were out of the control of the operators, believe me I feel you on that. However; that is just the nature of the beast, business is business. Better performing banking relationships get better rates. Another thing is the pricing philosophies of the banks. No two banks are exactly the same. Some want to ease their clients into a higher rate environment. They will slowly and methodically ease up the rates across the portfolio as a whole. While others think – they have to get adjusted sometime, might as well be now. As we get more accustomed to the rate environment, we will probably see the range tighten. There will always be a range though, because banks are different and operate differently. The range is just a bit wide right now as we adjust to a new normal. By new normal I mean prime not at 3.25.
Let’s talk about the banker side now. There are some out there that think that their banker charging them more this year means they are making more off of them and are thereby gouging them. No. Prime is what it is. If you had a rate of prime plus 1.00 in 2016 and still have a rate of prime plus 1.00 now…. then how are they gouging? It is still the same structure prime just happens to be higher now. I won’t get into the rate at which banks borrow money, ignoring that, the spread on top of prime is still 1.00. Y’all have got spoiled (me included). Yep I said it. 3.25 for forever have y’all thinking anything above 5.00 is price gouging. Nope. Rates change. 3.25 is not the reality anymore. I’ve said the same thing about the cotton market. When folks could lock in DEC 2019 for 75+ that was too low, because they were spoiled by 95 in 2018. It happens, we all get complacent thinking this is how things will continue to be, but it isn’t. So, of course there are some not so great bankers and banks out there just like any other business BUT chances are if you’re rate went up this year it is not because you have a bad banker. Chances are your banker fought to get you the best possible rate they could. However; if you think you truly are getting treated unfairly ( it does happen) feel free to reach out to me to discuss.
What should you expect going forward? I can’t tell you where rates will land. Will it go up anymore this year? Maybe. I can’t say with certainty. I do know you can be proactive in talking to your banker. Prime is what it is, but there are other structures out there. If no other structure will work with your LOC then ask for help running a rate sensitivity analysis. You can run certain analysis to see how much your debt load would increase and your overall debt service coverage would be impacted. Your banker should be able to help, if they can’t, once again you can feel free to contact me and I will help as best I can to point you in the right direction.
The reason I wanted to write this post was to let folks know the following:
1- In most cases your banker is not trying to gouge you. Unfortunately rates have just gone up.
2- Don’t wait until the last minute to run the numbers to see how different interest rate levels will impact your operation. It can do more than you think.
If you think follow up posts about how to perform rate analysis and other things you can do to offset your increase rate costs let me know.