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July 15, 2020

Restructuring Farm Debt

Create financial stability in lean economic times.

In uncertain times, farmers and ranchers who are proactive about their financial situation are more apt to be able to play offense when the tides shift and new opportunities emerge. Liquidity is essential in maintaining the success of an agricultural operation but can prove difficult to obtain when you find yourself overleveraged and unable to stay ahead of a heavy debt load.

In order to build a solid financial structure that can withstand the volatile and unpredictable nature of the agriculture industry, one must take the time to understand and analyze the operational cash flow. The current economic landscape holds many unknowns as we continue to navigate uncharted territory and a precarious global market.

It’s a tough situation that all too many farmers and ranchers slip into from circumstances outside of their control, whether it’s one bad storm or an unforeseen disruption in the market. Fortunately, there are steps that can be taken to ease this burden and provide liquidity to construct a more stable financial future.

Restructuring Alternatives to Manage Farm Debt

Farm debt restructuring options can come in a variety of forms. There is no one-size-fits-all solution and it is largely dependent on each individual situation. Find a lender with an understanding of agricultural finance and who takes the time to gain insights on the ebb and flow of your specific operation. Taking advantage of distressed loan restructuring options can relieve overleveraged assets and boost working capital in several different ways.

Adjust Payments

Debt consolidation is the most common strategy to restructure farm debt. Maintaining payments on multiple loan notes can be a confusing process that ends up becoming a costly mistake. Consolidating debt can adjust multiple payments into one, in turn, helping borrowers pay off debt with lower payments.

Case Scenario: In an effort to overcome a spout of adverse weather that had hurt his profit margins, a South Carolina farmer searched for a way to improve his current ratio and get back on his feet. AgAmerica’s debt consolidation package saved him over $116K annually and provided the capital needed to recover from crop losses in past years.

Farm debt restructuring can adjust payments based on what best fits the needs of the farm operation to monthly, quarterly, semi-annual, or annual payments.

Stretch Amortization

As you evaluate your existing debt obligation, one strategy to boost the liquidity of your farm operation would be to stretch the amortization schedule to lower payments. While shorter loan terms will result in paying down loans faster, stretching amortization can lower current payments in times of restricted cash flow. It’s important to note that long-term debt should be secured by long-term assets such as land that hold value rather than depreciate over time to hedge against volatility.

Case Scenario: A North Carolina cattle rancher utilized this strategy to improve his operational flexibility with a two-bundle package that included an extended amortization period loan and a 10-year line of credit.

Refinancing and stretching debt can improve your cash flow and current ratio which opens doors to future financing or expansion opportunities.

Learn how to use land equity to secure working capital.

Lower Interest Rate

Traditional lenders are often unfamiliar with the agricultural industry and deterred by its volatile nature—leading to higher interest rates and pushing farmers further from financial stability.

Case Scenario: A Wisconsin row crop farmer experienced this exact dilemma and turned to AgAmerica for alternative financing options. Through our flexible loan structure, we were able to drop his rate and cut his weekly payments by more than half with annual savings upwards of $240K. He used this boost in cash flow to invest in a farm trucking operation, which led to an additional source of income for his operation.

A low-interest rate climate—such as what we are currently experiencing right now—is an opportune time to refinance farm debt and secure a fixed interest rate.

Learn more about fixed vs. adjustable rates.

Utilize Interest-Only Terms

Farming doesn’t have a standard bi-weekly paycheck, oftentimes liquidity is needed throughout the year to secure future returns. Interest-only payments can be useful to float through periods of heavy capital demands.

Case Scenario: AgAmerica was able to help a second-generation Colorado rancher utilize an interest-only payment structure to bridge the gap between maturing loans and periodic returns. This consolidation helped pay down carryovers on the existing line of credit and boosted his operational capital to fund future investments and expenses until his next return.

Farm loans with interest-only payment terms can improve a farmer’s balance sheet and better position them to refinance debt to preferential rates at the end of the term.

Find out more about AgAmerica’s Interest-Only Line of Credit Program.

Strategic Financial Planning Advice for 2020

Financial security takes proactive action. If liquidity is low, there are alternative options to get you back on track—but ignoring a potential problem will only make it grow. Farmers and ranchers are intuitively frugal business owners who understand capital is needed to maintain operations in the good times as well as the tough ones. Strategies to develop a strong financial plan in 2020 include:

  • Monitor balance sheet and record cash-flow transactions;
  • Assess (and reassess) ROI to keep expense ratio as low as possible;
  • Read the fine print when applying for a farm loan; and
  • Stay in contact with a trusted financial lender.

Monitor Balance Sheet and Breakeven

Tracking your cash flow and monitoring your balance sheet will give you a better picture of the financial state of your operation. It will make you more equipped to seize opportunities when they arise and know when to take a more conservative approach. When applying for a farm loan, well-documented transactions can be utilized to explain any fluctuations in cash-flow from equipment purchases, a bad year of weather, or other contributing factors.

Evaluate ROI to Cut Unnecessary Costs

As tempting as that brand-new tractor might be, take a step back and be honest when evaluating its potential return. If the tractor that is a few years older is working just fine, chances are the ROI will be minimal. However, if precision ag technology has the potential to pay for itself by minimizing waste and improving efficiency, that might be well worth the investment. Especially in lean economic times, assessing operational costs regularly can shed light on opportunities to improve capital without becoming overleveraged.

Read the Fine Print

Pay attention to the details of loan packages and look deeper than the interest rate. Don’t hesitate to ask questions to gain a better understanding of what’s being offered. Are there annual fees? If you have a lucrative year, are you able to pay long-term debt off without a prepayment penalty? A lender who provides transparency and counsel specific to agricultural finance is an invaluable tool in setting your operation up for financial success.

Maintain a Relationship with a Trusted Lender

When you begin to feel overleveraged—with your capital shrinking and operational expenses growing—it’s important to stay engaged with your lender to be sure you understand the options available to you. If a lender is not open to maintaining a transparent and communicative relationship, find one who is. Top-ranking agricultural lenders have expertise in navigating a volatile industry and work hard to create solutions that push their clients in the direction of long-term stability. To take control of your financial future, you must take that first step in communication and face the reality of the situation head-on.

Alternative Lending Meets Individual Need with Flexible Terms

“Take precautions now to make sure you’re in a position to play offense, whether that’s this year or next year moving forward.”

Brian Philpot, CEO of AgAmerica.

As an advocate for American agriculture and a nationwide agricultural land lender, AgAmerica goes beyond a financial institution and values the lasting relationships we create with our clients. We understand the volatility of the industry—as many of our own AgAmericans have grown up within it—and go the extra mile to improve the financial stability of farms and ranches across the country. Our unique approach to land lending provides financing options to create room for liquidity and lay the foundation for long-term financial stability.

To learn more about debt restructuring opportunities that are available to you, please contact us today.

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