Understanding how working capital can cushion your operation during a volatile economy.
COVID-19 in the past month has uprooted millions of people across the nation affecting the way they live their lives and provide for their families. As the nation’s economy shakes with closures of non-essential businesses, lack of consumer spending and school closures playing a significant role in this, planning for the future of your farm operation when interest rates are low has never been more important.
The state of agriculture and the food supply chain has been disrupted by multiple factors including loss of global trade, increased shortage of farm labor, and a discrepancy between farm futures pricing and consumer demand.
Agriculture was recently declared a critical infrastructure by the U.S. Department of Homeland Security with $49 billion of the $2 trillion relief package going towards helping the food and agriculture industries weather this storm. Even with government assistance, farmers and ranchers are facing numerous obstacles to overcome in order to keep their operation running and profitable. The silver lining in the current economic state provides operators the opportunities to lower their total expenses, refinance, and consolidate their existing debt, as well as receive the working capital and cash they need to continue to work their operation.
“Cash is king right now. This is a good time to talk to lenders about lines of credit,” stated Brian Philpot, AgAmerica’s CEO. “Look at your balance sheet and if you don’t have what you feel like’s enough potential working capital, talk to your lender about your line of credit. “Think ahead rather than wait until the last minute and hope,” Philpot said. “Plan for it, right now. Farmers have to have cash on hand and available credit to weather the storm and get crops in the ground on time.”
Analyze Your Existing Capital Structure
Take this time to assess your existing debts and how much working capital you have. Discussing your financial situation with your lender has the potential to:
- Uncover alternative options that can lower payments; and
- Boost necessary working capital to fund your operation through economic uncertainty.
Having an initial discussion of how your lender will take care of you during this unprecedented time and what their recommendations are for overcoming this year to keep your operation successful for the long-term, is the first step to take. Now is the time to play offense, using your land – your best asset – to refinance, consolidate debts, lower your total debt load, and receive access to working capital. Analyzing your current financial ratios and what the next 2-4 months look like for your operation is crucial to understand the state your operation is in.
With so many rising obstacles and unknown variables, strong working capital has never been more important. High liquidity in your operation is what enables you to continue meeting financial obligations amid an economic storm. It’s what will make the COVID-19 pandemic a passing shower or torrential downpour for your operation. Liquidity is needed to finance the initial development of new business models that will keep farms operational through the impacts discussed above.
Working capital has become increasingly lean over the years, causing many farmers to begin dipping into their equity to fund operational expenses. Consolidating multiple farm loans into a single term loan at a lower interest rate is an alternative way to increase working capital. This type of debt restructuring permits a more flexible financial operation, which in turn allows you to adapt faster during volatile or disruptive seasons.
AgAmerica is Committed to Helping Farmers Who Sustain Our Country
AgAmerica is open and operating as critical infrastructure in both the agriculture and finance sectors. We are committed to providing farmers and ranchers with flexible financing packages that free up cash flow for their operation. As one of the largest nonbank lenders in the U.S., we offer flexible financing to purchase, refinance, or receive working capital through cash out options and revolving lines of credit. Speak with our Relationship Managers today to assess the financial state of your operation.