Many farmers have long finished their field work and are now in the deep into planning for 2019. If you’re preparing for a meeting with your farm lender and are feeling a bit uneasy, follow these 3 quick-and-dirty tips to help it go more smoothly.
1. Think Like a CEO
Darren Frye of Farm Futures says that farmers should learn as much as they can about what their lenders are looking for. This begins with straightforward honesty about your farm’s current financial situation. Consider working with an advisor that knows the ratios and metrics bankers want to see.
If some of your numbers aren’t quite where they should be, don’t worry. Let your banker know how you’re working to make it right, or how you plan to make it right. Be prepared to provide a clear story that reveals your current financials. The more details you can provide the better.
If you’re not running your operation like a CEO already, you better start working on it. Lenders want to work with individuals that are business savvy and operate their farms efficiently. Begin by having a clear cost structure and a clear marketing plan. This doesn’t mean you need to be able to predict the future- but it does mean that you need to be realistic. Know what kinds of market opportunities could arise, and know how are you positioning yourself to take advantage of them. Provide evidence that you can effectively manage your cash flow. You are in control.
2. Lending Options Abound
There’s a new type of financing now available to farmers. Larry Lee of Brownfield Ag News interviewed Bill York of FarmOp Capital- a lending institution that focuses on operating loans. The company offers “project type” financing that supports farmers’ abilities to produce crops efficiently. Each crop is considered a “project,” and they help improve purchasing power while also giving farmers more independence when it comes to planning and managing their operations.
Farming has changed a lot recently, but most Ag traditional financing has not. Many loans out there with flexible terms tend to have higher interest rates. So sometimes, in order to secure financing, farmers must change how they operate in order to get better rates. York says FarmOp Capital is here to fill that gap. York comments,
“Lenders tend to be focused on holding assets, real estate and equipment. We want to provide an additional funding source- a complimentary source- for those operators that have demonstrated that they can grow a crop, and be exclusively based on their ability to produce the crop.”
FarmOp Capital may allow farmers to restructure some preexisting debt by consolidation to save money, and they aim to work with both farmers and the primary lenders to come up with better solutions for everyone.
Good Old Farmer Mac
Farmer Mac, also known as the Federal Agricultural Mortgage Corp, is a publicly traded and government sponsored enterprise that’s been around for more than 30 years. Mike Wilson of Farm Futures says Farmer Mac is a secondary lender that secures billions of dollars for Ag loans.
They provide long-term fixed rate loans for hundreds of rural banks that don’t have access to those types of loans. Banks can usually provide financing for equipment and Farmer Mac provides financing on the real-estate end. As a result, banks get to keep their customers and farmers get to keep all their loans in one place.
Even if you think that you might not be eligible for traditional loan programs, there are almost always alternatives. There are USDA guaranteed loans that may be a good option. There are also alternative lenders. Farmer Mac works with these entities to provide interest-only arrangements to aid liquidity. According to Farmer Mac Executive Vice President Curt Covington,
“If we are going to be here for farmers and their lenders in the good times, we certainly need to be here for them in the bad.”
Do your due diligence to find financing that works for you.
3. Consider Paying Off Existing Debt
According to Ag Update, if your debt obligations are high and you don’t have access to typical operating loans- you must use caution before you consider before pushing family and farm related expenses to credit cards or higher interest debt. If it makes sense, sell some assets. You can use the money to aid in cash flow or use it to pay off existing debt.
Determine the assets you own that aren’t essential. Do you have any equipment that you no longer use? Is any of your equipment outdated? Maybe you don’t need to own that combine that you only use two weeks out of the year. Maybe hiring that work out is a better move financially.
Be careful to avoid selling assets that are necessary for production. Anything that helps create income should be the last thing to go.
If selling assets makes sense, you’ve got to remember a few things:
- Sometimes there can be tax consequences. When you’re selling farm machinery, the recapture of depreciation is called ordinary gain. It will be taxed at whatever tax bracket you fall into. It won’t be subject to self-employment tax.
- If any of your assets have liens against them, talk to your lender before you sell them. You’ll need to set aside a portion from the sale to pay the income taxes due. You don’t want all the proceeds to go to the lender without having the income tax covered.
There you have it. Three quick-and-dirty tips to help get you through your lender meetings: think like a CEO, know your lending options, and payoff existing debt.