Business of Agriculture: Debt Structuring and Loan Terms
The Business of Agriculture series covers finance, accounting and other business topics to help both beginning farmers and ranchers as well as experienced operators. Lisa Storm is Vice President, Credit Administrator with AgGeorgia Farm Credit, working in Perry, Ga. She’s been with the Farm Credit System for 13 years.
When it comes time for you to borrow money to support your agricultural operation, there are many considerations in determining what type of loan you need. As a borrower you should consider and discuss with your lender:
- The purpose of the loan
- Your philosophy regarding debt
- How the loan fits your business plan and helps achieve your long-term goals
Loan terms are generally broken down into three categories: Short Term, Intermediate Term, and Long Term debts. Generally, terms should match the purpose of the loan.
Short Term Debt
Short term purposes, such as operating debt, should be kept to one operating cycle of the farm, which is typically 12 months or less. Other common short term debts include lines of credit specifically for construction of farm buildings or farm improvements, and lines of credit to feed a beef cattle herd. These purposes are short term in nature and should have some conclusion with the end of the operating cycle – harvest of the crop and resulting liquidation of the operating line, completion of construction and resulting refinance of the debt onto permanent terms, and sale of the finished cattle with resulting liquidation of the line from sales proceeds.
Intermediate Term Debt
Intermediate terms are generally used for breeding livestock and depreciable assets, those items financed with a finite useful life. These debts typically have terms between one and ten years. Terms should generally be matched to the expected life of the asset being financed. As an example, a multi-pivot irrigation system has a longer expected life than most tractors, and thus will generally have a longer debt term. Another consideration for discussion with your tax accountant is the depreciable life of the asset being financed.
Long Term Debt
Long term debts are most often reserved for real estate and fixed assets, and generally have terms of 10-30 years.
Your personal philosophy regarding debt also has a strong influence on loan terms. Some borrowers are highly debt averse, and implement rapid and aggressive debt reduction strategies through utilizing shorter terms than normal in order to reduce debt faster; for instance, financing the farm real estate over 10 years versus 20 years. Other borrowers have seemingly endless debt tolerance, and should take care that they manage liabilities to ensure that they don’t exceed the useful life of the farm assets. In other words, making sure the tractor is paid off before it is worn out beyond repair and that the cattle herd is paid off before they are beyond useful breeding life.
Loan terms can be customized with your local Farm Credit lender to help achieve the overall financial goals of your farm operation. The key is to have a clear understanding of what your financial goals are, and effective communication with your lender to structure liabilities in order to help you achieve these goals. Your local Farm Credit agricultural lending experts are ready to discuss your borrowing needs and help you determine the appropriate debt term for your loans.
