Turning farm debt into farm profit – Hint 4 Read the document !!

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Hint No 4 – read and understand every word in your loan document

I am sorry for the week long gap in posting. I have been on the farm working flat out. It is hard to believe that fenced creek crossings that survived for 30 years have been knocked out and reinstated 4 times in the past 12 months or less.

My last 4 hints ( Nos 7,8, 9 & 10) are the most interesting but hint number 4 is very important.

Read and understand every word in your loan document. Lenders count on the fact that borrowers do not know the law or speak legalese and so rarely read the loan document fully. Even when they take it to a lawyer the lawyer often just peruses the contract or Letter of Offer and as long as it does not depart from the usual, advises the borrower that it is okay to sign. Never, under any circumstances use the same lawyer as the lender. A lawyer cannot serve the lender and you. The lender’s rights will always take preference.

Many lenders take the opportunity provided by expanding or slightly changing a loan facility, to insert clauses into it which favour the lender and disadvantage the borrower.  They count on the borrower assuming that nothing has changed. You will know that “assume” makes an ass out of “u” and “me”

In one revised 15 year loan contract I looked at, the bank had inserted (less than a year after the loan was originally offered to the borrower) a new clause requiring the borrower to sell the farm over which the loan was secured within 12 months and pay the proceeds to the bank. No mention of this change had been made to the borrower who was required to sign it on the farm when presented to him without legal advice.

Before we send a client to their lawyer for legal advice, we work through the contract or LOO with the borrower explaining the monetary impact of those clauses that require understanding rather than legal knowledge. Where the borrower does not completely understand a clause we mark it with a pencil cross for the lawyer to explain it fully.  We suggest that if the borrower is not happy with a particular clause, he or she crosses it out, initials the alteration and presents it to the bank saying they would not accept that term. In most cases if their reasoning is fair the lender will accept it.

The benefit of the loan application system which gets 2 or 3 lenders willing to lend, is that if the preferred lender will not accept the borrower’s deletion, one of the other lenders can be asked if they would. In such circumstances it is good to let the original lender know that another lender is being approached. Competition for the ultra-profitable lending business can be very persuasive.

Always check with a loan consultant for a Loan Impact Assessment so that you know what to expect  during the loan term. Then have a good lawyer who is not acting for the bank and preferably never does, advise you on all the legal implications.

Do not believe the fairy story that the bank will not sell you up if you default. I have sat with bankers telling a couple with young children that the bank would never force them out of their home if they got into trouble and then seen that very bank do just that. It is not that the lending officer is a liar. He or she believes the bank will treat borrowers fairly. But the person who forecloses and throws the family onto the street is a different person with a different perspective on life. Don’t be fooled and find yourself with nowhere to go like this goanna on a hot tin roof.go

I warned farmers about this in an article I wrote about 30 years ago in The Hereford Quarterly, but people in the bush have been raised to trust their bank manager. It used to be a good idea, before the banks were deregulated by politicians and realised that they could make super profits by entrapping borrowers, charging penalty interest rates then selling them up after a decade or so of trying to service an impossible loan.  It was that de-regulation that prompted me to move my GBAC Chartered Accountancy practice from primarily business profitability and tax planning into a bank loan problem solving consultancy.

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