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August 15, 2019

Farm Debt Consolidation 101

Learn how loan consolidation can help you successfully manage farm debt and strengthen your finances.

Today’s economic stresses paired with a predicted late, smaller harvest has placed an abnormal amount of financial pressure on America’s farmers, especially those with existing farm debt and operational expenses. For some farmers, now could be the ideal time to determine whether the pros of farm debt consolidation outweigh the cons and if consolidation is the right decision for your operation.

Farm debt consolidation offers farmers an attractive alternative to managing their existing debt under a single and often smaller payment depending upon their financial situation. It can also help reduce or eliminate high-interest payments, extend or shorten the length of financing, create one single payment, and transition between a fixed or variable rate. For farmers, this means the ability to improve debt coverage requirements and maximize their savings to help manage short-term financial obligations.

Understand Your Options When It Comes to Loan Consolidation

Debt consolidation is a viable option for most farmers who are looking to increase their working capital in the short term; however, it’s important to understand that not all consolidation options are of equal quality and in some cases, farmers could be substantially increasing their total debt over a longer period of time.

Most often, farm debt consolidation involves refinancing single or multiple loans into one agricultural loan with extended repayment terms, which means the borrower will carry the debt longer, but with smaller, more manageable payments across that term. We have seen this strategy give farmers the opportunity to expand the farm, make capital improvements, or simply qualify for a loan renewal in periods of low commodity price cycles.

Case Study: With an expansion in mind, a long-time bee business sought help from AgAmerica to consolidate existing mortgages and credit lines into a longer-term, lower interest rate solution. Through a $650,000 loan consolidation, along with a built-in cash-out, this substantially reduced the business’s annual debt service and allowed the apiary to continue to grow. The apiary, which markets bees for pollination purposes in Florida, California, Maine, and Indiana, has grown from 20 hives more than 30 years ago to 6,000 today. It also has expanded into honey, which now accounts for about 25 percent of the operation’s revenue.

Establish Good Credit and Manage Farm Loan Payments

Successful debt consolidation starts with a good credit score, which can lower the imposed interest rate on a consolidation loan. Credit bureaus establish scores primarily based on a debtor’s payment history and amounts owed, another reason to keep debt at a manageable level. The bureaus also consider the length of credit history, new credit, credit inquiries, and the credit mix. In short, financial power comes from higher credit scores, which lower interest rates and improve loan limits and eligibility.

Make Financially Wise Decisions with Your Farm Debt

Financial experts like Dave Ramsey advise not to consider debt settlement. While often referenced interchangeably, debt consolidation and debt settlement are not the same. In a debt settlement, a company that a debtor hires negotiates a lump-sum payment with creditors for less than what is owed. The debtor is then responsible to pay the settlement company, often with higher fees and challenging terms.

Similarly, debt consolidation does not mean debt elimination. The debt still exists under a reconstructed agreement. As Ramsey explains, making small changes to your spending, saving, and investing habits can have a compounding effect on your long-term financial state. Keeping track of your purchases and expenses are often a good place to start because it will give you more visibility into your own financial behavior.

Learn More About AgAmerica’s Farm Loan Consolidation

No two farms are alike. AgAmerica’s lending experts understand farming and can help families evaluate their capacity and risk, review debt consolidation options, and propose options to get the farm’s financials in line with its goals. Contact us today to speak with a Relationship Manager today.

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