Everything Looked Fine: Why produce credit risk hides from good lenders

Picture a credit officer at a regional lender. Call her Dana.

Dana’s borrower is a produce distributor, has been with the bank for eight years, and has never missed a payment. Dana reviews the company’s financials every quarter. The lien search is clean. The bureau report is green. By every standard in the credit policy, she did everything right.

Then, on an ordinary Tuesday, she gets a call. Several growers have sent notices claiming they haven’t been paid. Here’s what she couldn’t see: the distributor’s biggest customer had been slowing down for months.

To cover the gap, the distributor started paying its own growers a little later each month. By the time the quarterly numbers showed any strain, the growers’ claims were in, those claims sat ahead of the bank’s lien, and the strawberries on the dock were long gone.

I want you to sit with this part: nobody did anything wrong. Dana’s tools were never designed to see what happened. Here’s why.

1) You can see your borrower; the risk lives in the buyers behind it.

Your repayment doesn’t really come from your borrower’s balance sheet. It comes from the dozens of customers who owe your borrower money. In produce, many of these customers are private, family-owned, and thin-file.

To a bank, they’re a name on an aging report. General bureau data on small private produce buyers is often sparse, and an unknown buyer quietly turns into an ineligible receivable.

2) The warning shows up in payments, not in financials.

Produce runs on thin margins at high speed. When something goes wrong, there’s very little cushion, and the first sign is slow pay. The signal occurs months before it appears on a statement.

And the statements themselves are often private, stale, or both. You can read a balance sheet perfectly and still be looking at last quarter’s weather.

A clean search tells you your lien is in good shape, it doesn’t tell you who is standing in front of it.

3) The biggest claim on your collateral isn’t in any search you run.

Under PACA, unpaid produce suppliers can hold a trust interest in the produce, the inventory, and the receivables and proceeds that come from it.

The trust arises by operation of law. Suppliers keep it alive through language on their own invoices or through written notice, not through a public filing. So there’s nothing for your lien search to find.

A clean search tells you your lien is in good shape, it doesn’t tell you who is standing in front of it. Note: I’m not a lawyer, and this is not legal advice. Your PACA counsel can walk you through the specifics.

4) Generic data was built for the generic economy.

I want to be careful here, because your bureau isn’t wrong. It’s answering a different question. It was built to cover the broad market, and it does that well.

The produce trade, meanwhile, has been reporting on its own payment behavior for 125 years, inside its own community. That’s a different well, and general tools weren’t designed to draw from it. The two work best together.

5) Your own history can’t teach you about a stranger.

Your internal data is excellent on customers you’ve had for years. It says nothing about the new buyer on next week’s invoice. And produce defaults are relatively rare and tend to cluster around bad seasons and bad shipments, so any one institution’s loss history is a thin teacher.

Given a receivable is only as good as the buyer behind it, a quarterly review simply can’t keep pace with a product that spoils in a week.

6) The clock runs faster than the review cycle.

Strawberries have a shelf life measured in days. If a lender has to move on collateral, there may be nothing left to move on, which makes the receivable the real collateral. Given a receivable is only as good as the buyer behind it, a quarterly review simply can’t keep pace with a product that spoils in a week.

So what would Dana have needed to see?

Three things, and none of them is exotic: first, her borrower’s biggest buyer sliding on payment pace over the past 12 months; second, the borrower itself stretching payments to its own suppliers, and third, claims or complaints starting to appear.

It’s not as if this information doesn’t exist but it lives in places lenders don’t usually look.

Have you had your own version of this?

If you’ve lived a version of Dana’s story, you’re in very good company. Most of the lenders, factors, and insurers I talk to have. It’s one of the most common things I hear.

Here’s a simple test. Pull 20 produce buyer names off a recent file and send them to me. I’ll show you what we can see that your current tools are missing. And where we have nothing, I’ll tell you that too.

You’ll still make the credit call. We just want you making it with the full picture.