As farmers watch their harvest flow through their combines, thoughts are turning to 2018 and how a production plan will look. With commodity prices still at low levels, profit margins will be tight or nonexistent which will make financing the 2018 plan a challenge. With cash reserves already depleted, how can growers get the financing they need? The answer is operating credit, says Doug Cox, regional VP for Indiana Farm Credit Mid-America. “In times of tight cash flow, operating credit allows your farm to access the inputs and materials it requires while freeing up working capital for strategic decisions,” stated Cox.
In this month’s Financially Speaking program, Cox offers five ways you can optimize your operating credit line and protect your business from poor lending practices.
1. Project cash flow
“If you don’t have a cash-flow projection, one of two things will happen: Either your line of credit will be too large or it will be too small. Neither is good for a business,” said Cox. He added Credit lines that are too large may accumulate capital purchases that could have a better structure of repayment. A loan that is too small could leave you with too little capital mid-season when opportunities arise.
2. Build a strong relationship with your lender
The more your lender knows about your operation, the better he or she will be able to help with your financing needs. Cox advises keeping an open line of communication with your lender and speaking up early about potential problems or pitfalls, “Clueing your lender in on any long-term plans, like purchasing land or new equipment, will also allow you to plan more effectively together.”
3. Come to the table with a plan
Potential lenders want to see an operation grow its balance sheet year over year. “During tough economic times, growth can be difficult to show,” said Cox. “Most lenders who work with farmers understand that even the most productive operations can fall victim to the economy. If your balance sheet has regressed, have a plan on how you foresee rebuilding it. This will go a long way toward helping you secure operating credit, even if your farm isn’t in the strongest financial position.”
4. Pay back operating loans as soon as possible
“We recommend paying down your operating line as soon as possible,” advised Cox. “First and foremost, this will help keep frozen debt off your books. And when margins are squeezed, paying down debt quickly will reduce the amount of interest you pay. Interest saved is direct dollars earned for your operation.”
5. Customize your operating loan
Operating loans are built to accommodate your operation and your business cycle. For instance, if you don’t bring your product to market until November, your operating note shouldn’t be due at the beginning of October. “At Farm Credit, we sit down with farmers to truly understand their businesses so we can structure their operating loan in a way that is helpful, not burdensome,” said Cox.
For more resources from Farm Credit Mid-America, visit e-farmcredit.com.