Our family took a vacation recently to Big Sky, Montana and Yellowstone National Park. My wife had planned each day of the trip and loaded it with various activities. The trip provided a wonderful and much-needed break for our family.
One day my wife planned for us to do zip lining on a course over the Gallatin River. The plan was to have out two teenagers to participate in the three hour course and my wife and I would spend some time relaxing on the porch of the business with each other. I enjoy taking time just to visit with her.
On this day, my son was not feeling well and we had already paid for two people to zip-line. My daughter begged me to go with her. I reluctantly agreed to go. I don’t really have a fear of heights; I have a fear of falling from heights. Gravity can be a real bummer! But one thing I learned is how much zip lining is like good commercial lending.
After fixing us up in harnesses, helmets, and cables, we piled in a van to make the three mile trek to the course. The course had six lines with two of them travelling right over the Gallatin. I wished that I was in the river with my fly rod rather than flying through the air above it.
The guides first gave us a lesson about the quality of the safety gear we would be using. It made me feel very confident in the quality of the gear as long as I had both feet solidly on the ground! The main part of the gear was a harness that went around both legs, your waist, chest, and shoulders. The harness had a main carabiner that was hooked to a trolley which went rode on the line. Two additional lines were also hooked to the trolley, each with their own carabiners attached. Each carabiner was strong enough to handle over 600 pounds of weight.
We climbed up to the first zip line platform and the first guide gave us some final instructions and then plunged down the 600 foot line to the platform on the other side. As I waited in line, I had one overriding thought that I must maintain bladder control. I worked so hard to learn this as a toddler and avoid putting myself in situations where I may lose it.
The time finally came for my turn. The guide hooked up the trolley and the main carabiner. Next the first safety carabiner was attached. The guide radioed on a walkie-talkie to the receiving guide to see if it was clear to zip. Once the OK was given, the second safety carabiner was attached and it was time to take the jump. I must admit that my screams were manlier then they sounded as I plunged into the air.
As we progressed through the course, each time it was to take a jump, the same process was followed. Hook the main and first safety carabiner, radio for clearance, hook up the backup secondary carabiner, give the OK for the jump, step off, scream, and pray for bladder control.
I found that zip lining is a lot like commercial lending. In commercial lending we try to figure out what will be the primary source of repayment for the loan. A hotel would be net operating income from room nights, a cattle farmer would be proceeds from the sale of cattle, and a rental office building would be net revenue from the rents. But what happens if the first carabiner fails?
That is when the second carabiner kicks in. We refer it to the secondary source of repayment. This could be the guarantors’ financial strength, sale of breeding stock, or re-rental of a marketable building. But what could happen if both the first and second sources of repayment fail?
That is when the third carabiner kicks in. This is the tertiary source of repayment. Some possibilities here may be the strength of the guarantor or sale of the asset that is being financed.
Oftentimes, the officer will not look hard enough to accurately identify what are the second and third sources of repayment. Heck, I have even seen loans where the primary source of repayment is not clearly outlined in the write up. I have also seen some where repayment sources as weak as “additional borrowing”, “speculative land sales”, or “possible future income” in write ups.
Sometimes it appears the first repayment source appears to be strong enough. Maybe it is a credit tenant or government contract. I have seen cases where credit tenants like Circuit City have fallen or where US Government contracts have gone away. It is important to consider alternative repayment sources even when the primary source seems extremely strong.
The goal of giving any loan is to get repaid. The saying that the best loans are the ones that payoff is true. The analyst must identify what each of these repayment sources are in order to best insure the loan will be repaid. It is also important for the borrower to relate his plan for his second and third carabiner to gauge his ability to manage the business in times of trouble to put you in the best position for repayment. Commercial lending is a humbling occupation and at the end of the day if you have minimal losses and no soiled underwear, you have really accomplished something great.
We are also hosting a Basics of Agriculture Lending Class on October 8-9 in Miles City, Montana. Please contact us with more details.