What to Know, Before You Go
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There probably has never been a shortage of people willing to forecast what will happen in financial markets – today’s communication tools simply amplify their presence and widen their distribution. In times of turmoil, these pundits seem to shout louder and exude boundless confidence in their positions. Ironically, the failure of any one prediction does not in any way diminish their certainty in their next prediction.
However, if there is anything I have learned in more than forty years in the banking industry and as a participant in the markets both personally and professionally, it is that these predictions are almost always wrong, not only in magnitude, but often even in direction.
So why do we keep reading and listening to these erstwhile forecasters? The answer is that we all feel comfortable with the momentum of a trend. Our favorite forecasting tool is usually a ruler – we intuitively extrapolate any given trend far into the future, while reality unfolds with unseen inflection points kicking trends to the curb.
Betting the financial future of our investments, of our business, of our borrowing capacity, on such predictions provides a false sense of security. Geopolitical events, trade disturbances, regulatory shifts, weather instability, social trends, monetary policy shifts, etc. all can change very quickly and arbitrarily. Not recognizing the risks posed by these inflection points poses material risk to our financial well-being.
Here are some practical steps to break away from betting your financial future on the current trends and pundit predictions:
1.The most important question to ask in developing any financial strategy is: “what happens if I am wrong?” For example, if everyone thinks rates are going to go up over the next year, what happens to my business if rates fall instead? What happens if they go up twice as much as predicted?
2.Develop the “four corners” strategy:
3. What buffers do you have to assure adequate access to capital/funding and to take advantage of opportunities when they are presented?
4. Optimize your financial strategy, don’t try to maximize it. If you are currently experiencing good financial results and have a loan against long-term assets (e.g. real estate) that is coming due in the next couple of years, consider refinancing it now for as long a term as possible. By taking control of the timing of the roll-over, you are in a stronger negotiating position than if you wait until its maturity is near and you will have to deal with whatever market conditions and financial results exist at the time. Long-term debt is a key piece of your financial structure - don’t make bets with it.
5. Schedule periodic (at least annual, if not semi-annual) performance updates with your banker or their credit analyst to keep them informed as to changing dynamics of your business and prepare for any changes as early as possible. Do they seem to be actively trying to understand the dynamics of your situation and future plans? If not, make the effort to bring them up to date. They will appreciate it and will be better prepared to help you with strategies to achieve your goals.
Pursuing these questions with your banker and staying up-to-date on them can provide both parties with the comfort that you are protecting your financial resources and operating with the maximum credit flexibility available. While it might seem that your current arrangements are “good enough”, taking the time to manage the relationship can pay enormous dividends when pricing or production hiccups occur.
If you would like to explore these topics further, we would welcome a conversation. A good lender should be able to listen intently to your objectives and help you select the loan terms that best permit you to take advantage of today’s rates and structural alternatives. McHenry Savings Bank can provide a full menu of attractive financing alternatives. Please feel free to contact us to discuss your situation or address any questions you may have.
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Don Wilson Chairman, President & CEO, Tim Kempel SVP - Agribusiness Banking,
McHenry Savings Bank
McHenry Savings Bank,
Chairman, President & CEO,
SVP - Agribusiness Banking,