Farm news and views column: Perhaps there are more than 5 C's to Credit

3:15 PM, Jul. 6, 2013  |  Comments
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Recently Greg Booher penned a thought-provoking column on the Five C's of Credit. It expressed some awareness that market conditions have changed in the agricultural finance world and some frustration with those changes and how they are affecting rural Wisconsin.

It has been interesting hearing the comments on the well-written article. I have to admit there is a wide range of opinions on the topic of credit. Some folks actually were harsh with the thoughts expressed and others thought the column did not go far enough in damning the lenders that serve rural Wisconsin.

I think Greg's list was a little short - I would like to add two more C words: Caution and capital. That may seem strange to use those two words together after watching lenders loan money with a foolish attitude for most of the past 20 years. The housing boom and bust, the office building boom and bust, the commercial building boom and bust, and the land boom and bust of the 1970s demonstrate that fools and money tend to attract each other and just as quickly separate from each other. This should not surprise anyone. Human beings are behind all of this behavior.

Caution may refer to a potential hazard or some probable effects of an act. In the world of credit it refers to what can and may go wrong and what can be done or should be done to control risk factors. Seven banks in Wisconsin have failed since the recent recession. Others have merged or have been reinvented with other investors. Most of this has been done in secrecy to avoid panic with the public.

That is a good thing. It has been expensive for all of us already, and panic behavior would just add more costs to all of us. Those costs would not just be economic. Social unrest has caused loss of life in some regions of the world. There must be steps taken to prevent the spread of social unrest.

Institutions like FDIC have done great things in the past six years. It is important to remember that 479 bank failures have occurred nationwide since 2008, and this has created enough hardship. All lenders have become familiar with the idea that caution in decision making is important in the survival of a financial institution as we move forward.

Those that do not exercise caution may not be part of the future. It is important for individuals, families and businesses to exercise caution in decision making. Caution is not living in fear and being frozen and unable to move forward.

Capital is another major part of the credit world. PNC Bank's website says it best, "Banks want to see that you have a financial commitment, that you have put yourself at risk in the company."

Too often I see individuals look at lenders as venture capitalists. Lenders are not venture capitalists. They have no resources for gambling. Working capital is a must for any business to succeed. Working capital is a financial metric that represents having enough liquidity and is calculated as current assets minus current liabilities. If there is not enough working capital, there is a working capital deficiency. Without working capital, a firm or farm is not able to continue.

It is a must to have enough funds to pay maturing short-term debt and operational expenses. This applies to families and to units of government. I have heard too often from people that when their checkbook is flush with funds, they know things are good. Of course, this is often before the bills are paid.

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If you've ever answered "Who has the ball?" with "It's halftime," you might recognize The Airhead. Check out the characters in our cartoon gallery of oddball fans.

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