Five Steps For Accessing Operating Credit

Farming requires ready access to cash to pay both vendors and employees. Operating lines of credit can help meet these financial needs, providing access to capital as you need it and leaving more of your working capital available to support strategic business decisions. Here are five steps you can take to get the operating funds you need.

1. Maintain a strong lender relationship
 

Lending decisions are made based on a number of factors, including confidence in the borrower’s character and capability. Building and maintaining a strong relationship with your lender highlights these factors and helps build trust, which is critical in lending decisions. It’s also important that your lender has a thorough understanding of your operation and your ability to manage it. Gaining this trust and understanding requires honest and complete communication over time.

2. Create a business plan
 

Much of the information your lender needs to make a credit decision can be found in a business plan. The business plan should define what crop and how many acres will be planted, what it will cost, projected yields and expected revenues based on average prices. By providing narrative and analysis, the business plan can speed lending decisions. Perhaps most importantly, the business plan can demonstrate knowledge and experience.

It’s been said that “if it won’t work out with pencil and paper under the shade of a tree, it’s not going to work in the field.” Developing a business plan offers clarity about your operation’s performance and can inform future plans such as expansion, generational transition and new crops or marketing strategies. It’s also important to remember that a plan is a roadmap that should be compared against actual outcomes throughout the year.

3. Project your cash flows
 

Cash flow calculations show the lender what funds are needed, when and how they’ll be used, and when and how the debt will be repaid. Operating loans need to be paid out of the same crop cycle for which the funds were used.

Ideally, the cash flow will detail relevant information by crop, which can help you decide which or how much of a certain crop to plant. It can also help you identify and make changes to input costs or other expenses or recognize that some off-farm income is needed for the year.

Cash flows should be calculated at the start of the growing season but, as with the business plan, they should be updated as things change. This can help you identify and explain to your lender any changes in operating credit needs throughout the season.

4. Customize your operating line of credit
 

Using your business plan and cash flow projections, you can better budget for the amount of operating funds you’ll need – and plan for when you’ll need them. This varies by individual operation and by type of crop grown. Operations raising a single crop could benefit from a static operating loan, while an operation raising multiple crops might do better with a revolving line of credit to access funds at different points in the year, repaying the loan as crops are sold.

Customizing the operating line of credit can reduce fees and interest expenses by borrowing only what you need, when you need it, while also ensuring that your peak cash needs are met so you can make wise operational decisions throughout the season.

5. Extend your business and operational knowledge
 

Knowledge is power, so developing extensive financial, operational and industry expertise can both empower your business management and help strengthen your lender’s confidence in you.

This expertise can include developing marketing, risk management and personnel plans; creating and using an effective record-keeping system; and computing key financial ratios and break-even analyses. Obtaining this insight can come through building an advisory team and attending educational seminars.

Using benchmarks such as yields, costs per acre and financial ratios can increase your understanding of your operation and how it compares to others in the same industry. A variety of benchmarks are available through the U.S. Department of Agriculture, Cooperative Extension offices, agricultural universities and the Farm Financial Standards Council.  

Sources
Keith A. Raynor, CPA and Certified Agricultural Consultant, TRP Sumner