Refinancing Your Farm Operation: What You Need to Know

If there is one thing we know about farming, it’s that sometimes things don’t go as planned. The unpredictability of the weather, commodity and market prices, and crop yields can result in tremendous volatility for a farmer and their family. Recently, government tariffs on commodities and severe weather events have made a significant impact on farmers’ ability to produce a good margin of profitability to plan for future years. When obstacles like this occur, many farmers consider refinancing their farm operation to recover from the previous year.

In this article, we will discuss the common reasons why farmers and landowners refinance their operations, review some case studies on farmers who have refinanced their farm loans, and discuss what typical banks and ag lenders look for in qualification requirements to refinance.

Common Reasons to Refinance Your Farm Operation

One common reason why farmers refinance their farm loan debt is to improve cash flow and working capital to manage short-term financial obligations. Since 2012, working capital in the U.S. farm sector has significantly declined, making it even more important for farmers to consistently monitor and mange their financial posture including their farm loans.

Other reasons to refinance farm loans include:

• Debt consolidation into one lower interest payment;
• Reducing monthly payments or looking for alternative options for flexible payments;
• Ability to alter the maturity of your farm loan and to receive longer amortization periods;
• Qualifying for a loan renewal in times of low commodity price cycles;
• Expanding a farm operation;
• Capital expenditures for improvements to farm operation; or
• For less restrictive loan covenants.

Case study #1: Two South Carolina corn farmers came to AgAmerica for assistance with refinancing their farm loan to help them recover after a series of damaging floods. AgAmerica provided a custom loan package that helped reduce their annual interest expense by 20 percent, saving them more than $20,000 annually. This gave the borrowers the financial flexibility to bounce back from the natural disaster and continue operating their farm.

Case Study #2: A large, multi-generation operation in California dedicates their farm acreage to getting U.S.-grown Hass avocados to our tables. After years of successful seasons, they were ready to expand their operation and needed the right agricultural financing. By refinancing their existing debt, AgAmerica provided them with the working capital needed to expand their avocado operation. The farmers received a customized $9 million “two-pack” loan solution, combining a term loan with our industry-unique line of credit. The operating credit line gave them the funding necessary to focus on converting more land into avocado acreage, without the hassle of standard annual paperwork or renewals.

How to Begin Refinancing Your Farm Loans

There are five lending factors, otherwise known as the 5 c’s of credit, that assist ag lenders in determining a borrower’s risk for defaulting on a land loan: Character, Capital, Capacity, Collateral, Conditions. The stronger these factors are, the more likely farmers will be approved for a refinance on a loan. The best place to start is by taking a proactive approach with effective financial recordkeeping; providing complete and accurate documentation allows financial lenders to make a more informed decision on a borrower’s loan capacity and risk. Each bank and ag lender will have their own threshold of the amount of risk they are willing to take to provide a refinance loan.

AgAmerica is unique in that we are one of the largest, non-bank ag lenders offering both conventional and non-conventional loan products, enabling us to create customized packages that help farmers and landowners meet their refinancing needs. Moreover, AgAmerica evaluates off-setting strengths within your loan as well, if your lending factors don’t meet specific requirements. As the agricultural landscape continues to evolve, it’ll be important for farmers to create a partnership with their ag lender that will help meet their financial obligations for generations to come.

If you’re ready to refinance your operation or would like to learn more about our custom lending solutions, contact our team today.