Considering Ag Refinancing Options

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Considering Ag Refinancing Options February 28, 2017

In today's tight agricultural economy, a lender may require you to provide additional loan collateral—including land—as a condition for receiving continued operating credit. For example, if your carryover operating debt is $160,000, the lender might suggest moving the loan onto some land, machinery, or other property that is clear of debt. The $160,000 might be put on a new note, payable over eight years. Instead of having to pay the entire $160,000 back all at once, you could pay $20,000 per year plus interest. This refinancing of the carryover operating debt should improve your cash flow.

Ideally cash flow would increase to the point that you could repay all of the 2017 crop year’s operating expenses plus the $20,000 plus interest intermediate loan payment.

Yellow Flag Calls for Third-Party Counseling

When the operating lender asks a grower to provide additional collateral to continue an operating loan, this is a warning of a shaky financial situation. The producer needs to immediately obtain financial counseling. An excellent financial counseling option is through the Department of Agriculture's Ag Negotiations Program (800-464-0258 or 800-466-4071).

Financial counseling can help you evaluate your financial options. An important risk to evaluate is the likelihood that you can improve your financial situation and get current on all debts and, if so, how long this turnaround might take. In the 1980s, during difficult financial circumstances, some producers found that a partial liquidation provided sufficient financial breathing space to allow them to hang on to the downsized operation.

Giving an operating lender additional collateral—such as land—may be one way to maintain an operating credit line for another year. However, without careful and objective analysis of the your financial situation, you may find yourself in the same financial position after the 2017 harvest.

If your bank proposes this debt restructuring plan, be sure to determine whether it's economically sustainable without a significant increase in net farm income. If it isn't, you may end up in worse shape down the road.

Note: This information is provided for educational purposes. It is not intended as legal advice.