Preparing for Farm Loan Renewal Time01/16/2017
Shortly before Christmas, I was watching a Christmas movie with my family about a farm family who was in jeopardy of losing the operation if they didn’t come up with the required payments by January 2. You can guess, as well as I did, that it was a Christmas miracle and the necessary funds were found on Christmas Eve. While the story was predictable, it made me wish the struggles of the real farm economy could be fixed in less than two hours, with no family arguments and the only unknown being how it would be solved, not if.
The reality is that some operations are going to be faced with the real issue of foreclosure this year. Others will need to look hard at restructuring debt, switching lenders, making major changes to their operation and/or living, and maybe even selling off excess assets. So how can you make your operation be the best it can be through a stressful renewal season? Here are a few things to consider before you go into your renewal appointment:
- Be prepared. Come into your renewal appointment with a plan. Have detailed estimate of your costs for the coming year, a cash flow that makes sense and is grounded in reality (no $7 corn sales), and include reasonable spending for family living. If your cash flow shows significant changes from previous years, come with an explanation. For example: “My family living is down 20% from last year. We have a monthly budget and a commitment from our family to stick to it. We will send monthly accountability reports to show we are serious.” If you just reduced family living to make the cash flow work without a plan on how to make that change actually work, it’s not believable.
- Be honest. Being honest with yourself is just as important as being honest with your lender. Take a hard look at your operation and figure out WHY your operation is having a tough time at renewal. It isn’t just because commodity prices are down. If that were the case, every operation would be experiencing this stress and they are not. So what’s different about your operation? What costs have changed in the past five to six years? Where can you make different choices about your costs?
- Be accountable. This is YOUR farm operation. YOU get to make the choices about how the money is spent. Many times I hear, “We just don’t have a choice on how much we spend.” The reality is you make choices every day. You can choose a different seed variety or a different seed vendor (or any other input). You can choose to operate older equipment instead of having the latest and greatest technology. You can choose between buying a $60,000 family vehicle or a $30,000 one. You may have to make unpleasant choices, but they are still your choices to make. The choice of whether or not a bank continues to finance you may not ultimately be yours, but the choices that led to that decision were yours.
Being ready for your appointment may only be half the battle, but it will show you have a commitment to turning your operation around.
When a Farm Operation Loan is Denied
If your bank does deny continued funding, there are other options to consider.
- Your current bank is not the only one who can finance your operation. You can go back to the “drawing board,” get even more organized and prepared, and try another bank or two.
- If you are unable to obtain credit elsewhere, you may qualify for a loan from the USDA Farm Service Agency (FSA). The funding for these loans can change from year to year and is set by the government so there may be first come-first served access to these loans. More information about these loans can be found at: https://www.fsa.usda.gov/Internet/FSA_File/fsa_br_01_web_booklet.pdf
- Consider liquidating some assets. It may seem like you can’t operate without ALL of your equipment, but it may be a good time to rent some of those larger assets such as a combine or have your harvest done by a custom harvester. If you sell some equipment so you can retire debt, you may be able to put yourself into a position where you can service the remaining debt while continuing to farm. You also may need to liquidate some land to keep going. Don’t forget to hold back some proceeds for income taxes.
- Bankruptcy may be a word that comes back into normal conversation. Our office is preparing to dust off old books and take classes to prepare for potential questions from farmers hoping to avoid or best navigate through the potential reality of bankruptcy. While avoiding bankruptcy will be ideal, the laws exist for a reason and may be a good tool for you to use so your operation can continue. Unfortunately, bankruptcy is complicated and the services of a good attorney and accountant will be necessary to complete the process.
Seek Expertise and Engage Your Support Network
Regardless of the outcome, going through a stressful renewal is tough on everyone. I don’t know a single lender who got into the business with the goal of putting farmers out of business and I don’t know a single farmer who wanted their business to end with a liquidation.
Using your management team is going to be important. It may seem silly to be paying professional fees when you are trying to cut costs, but many of these issues are very complex and require detailed expertise.
It is also stressful for your family. Consider professional counseling to protect those relationships, your marriage, and your mental health. Talking about financial struggles is never fun, but keeping it to yourself could cause even bigger consequences.
Several sources of assistance are readily available to you.
- Nebraska Extension has developed a team of educators trained to help producers improve their financial literacy. For more information, contact your local extension educator.
- The State of Nebraska also has the Farm/Ranch Hotline ready to provide immediate help. Call 1-800-464-0258 to find financial, legal and counseling services and referrals.
Source: Tina Barrett, University of Nebraska CropWatch