Restructuring vs. Refinancing Farm Debt: What’s the Difference?
A farm financial strategy can take many forms. AgAmerica can help you find the right fit.
As agricultural operations grow and evolve, shifts in interest rates, land holdings, operating costs, and long-term business goals can all prompt producers to take a closer look at their existing debt. Two strategies that often come up when this happens are farm debt refinancing and restructuring.
But wait, isn’t that the same thing?
While these terms are often used interchangeably, they actually describe different approaches to changing an operation’s financing.
Keep reading to understand the difference between restructuring vs. refinancing farm debt to make a more informed decision when determining which strategy best supports your operation.
The Difference Between Restructuring vs. Refinancing Farm Debt
When it comes to your farm debt, refinancing and restructuring aren’t necessarily competing strategies. In some cases, a landowner can restructure existing debt without refinancing. In other cases, refinancing may be the way to achieve a broader restructuring of the operation’s debt. For example, if multiple loans are held by different lenders, consolidating them into one loan will generally require refinancing those obligations with a new lender.
The right approach depends on what you’re trying to accomplish and whether the existing financing can be modified to meet that need.
Refinancing typically involves replacing your existing debt entirely. Restructuring focuses on changing how existing debt is organized or repaid.
Does refinancing mean adding new capital to the loan?
No. Refinancing does not inherently mean borrowing more money.
For example, a farm debt refinance can simply replace an existing $2MM loan with a new $2MM loan that has a different rate, amortization period, payment schedule, or other terms.
Farm debt refinance doesn’t automatically mean you will be taking on additional debt. It could just involve replacing the existing financing with a new structure.
That said, a refinance often does include the option to access additional capital. For example, one AgAmerica client refinanced an existing loan through our Accelerate Land Loan Program to restructure terms and secure a $321K cash out to upgrade his on-farm creamery.
Does refinancing require more paperwork?
Yes. A refinance typically involves a new credit transaction, so the lender will need to evaluate the borrower and proposed loan.
A true farm loan refinance typically involves a new credit transaction, so the lender will generally need to evaluate the borrower and the proposed loan. Depending on the transaction, that can mean updated financial statements, tax returns, balance sheets, income/cash-flow information, property information, credit documentation, appraisals, title work, and other underwriting materials.
However, restructuring can also involve substantial documentation, particularly if you want to make significant changes to the loan terms.
Can you restructure without refinancing?
Yes. This is one of the key distinctions between the two strategies.
You are able to modify existing farm debt without replacing it with an entirely new loan.
For example, suppose a farmer has a $3MM existing land loan with a payment schedule that no longer fits the operation’s cash-flow cycle. The lender could potentially modify the repayment schedule or extend the amortization period rather than replacing the loan with a new one.
Which Strategy May Make Sense for Your Operation?
The answer depends largely on what you’re trying to accomplish with your financing. Before deciding whether to restructure or refinance farm debt, consider the bigger financial picture.
Think to yourself:
- What am I trying to accomplish?
- Does my current debt structure still fit my operation?
- How would a new structure affect cash flow and working capital?
- Do the benefits of refinancing my farm debt outweigh the cost?
- Will the new structure better support my future plans?
Here are some common use cases we’ve come across over the years as a leading nationwide rural land lender.
- Your existing debt is generally a good fit but needs slight adjustment.
If the underlying financing still makes sense, but certain terms no longer fit your operation, restructuring may be worth exploring.
The focus is on modifying the existing debt structure rather than replacing the financing altogether.
- Your current financing no longer matches current needs.
If the terms of an existing loan no longer align with your operation’s financial position, cash flow, or long-term plans, refinancing may provide a better opportunity to establish a new structure.
This could be particularly relevant when an operation has changed significantly since the original loan was established.
- You would like to consolidate multiple loans into one simple payment.
Managing several loans with different lenders, rates, and payment schedules can make it harder to get a clear picture of your overall debt. Refinancing may allow you to consolidate some or all of those obligations into a single loan and payment.
Before consolidating, consider more than just the convenience of one payment. Look at the new loan’s total cost, repayment schedule, impact on cash flow, and how it may affect your ability to finance future opportunities.
- Your long-term goals have changed.
An operation’s financing needs can change when it expands, acquires additional land, invests in infrastructure, or prepares for a transition to the next generation.
A change in long-term strategy can be a good reason to review your existing financing and determine whether a restructuring or refinance is needed to better support the direction of your business.
Evaluate Your Farm Financing Strategy Today with AgAmerica
There isn’t a universal answer to whether refinancing or restructuring is right for an agricultural operation. The better strategy depends on your existing debt structure, financial position, and long-term goals of your business.
For some producers, simply modifying existing debt can achieve this. For others, replacing existing financing with a new loan may provide a better long-term fit. In many cases, elements of both strategies come into play.
Fortunately, you don’t have to figure all of this out alone. AgAmerica’s lending experts have helped thousands of farmers, ranchers, and rural landowners evaluate their existing financing and create a loan structure that aligns with their operation and long-term goals.
Explore AgAmerica’s farm loan refinancing solutions to evaluate your current financing strategy.
