Partnering with the right people, especially when it comes to your operating loan, can make a world of difference as you manage or expand your farm business.
Assuming you have a goal in mind, taking a hard look at your true cost of capital is a great place to start when considering farm expansion. After that, it’s time to take a look at your interest rate and cash flow needs.
But, perhaps the most difficult answer to ascertain is whether or not your lender is really in it for the right reasons. Are they going to focus on your hard assets, or are they ready to pitch in and let you ask, “What if?”
Find a Lender Who Helps You Lower Your True Cost of Capital
Most farm operating loans are based on hard assets rather than crop production, making it even more difficult for farmers who rent ground to secure credit. These farm operating loans from community banks or other agricultural lenders are often seen as better or more affordable because they have a lower interest rate.
Crop production-based loans, like those offered by FarmOp Capital, are often incorrectly associated with an overall higher price tag if they have a higher interest rate. But if you dig into your overall finances, it’s easy to see that determining the true and total cost of overall farm operating capital is more complex — and gives a better picture of your overall financial health than just the interest rate on your operating loan.
In fact, much more goes into your farm’s overall cost of capital: Loan terms and structure, including the overall size of the loan, loan timing, loan amount and interest rates from third-party creditors, as well as when you normally sell any reserved crop.
Once you have a clearer picture of your true cost of capital, the next goal should be to lower it. Taking additional loans from third-party creditors out of the equation, and selling your crop when the market favors it rather than when it’s time to pay off your operating loan can free up additional cash to reinvest in your business, like making infrastructure improvements on your farm.
Keep That Cash Flowing
Generally, farm operating loans cover only a portion of the amount you need. The reason is simple: Community banks or other agricultural lenders simply may not have the needed approach or capacity to finance the size of loans needed when you’re expanding your farming operation.
If that’s the case, it may mean that you need to supplement your operating loan with other loans. If the primary operating loan only covers 60% of your farm’s annual capital needs, third-party credit is often needed to fill the gap. So, what started as a relatively low-interest rate on a farm operating loan has now expanded with third-party creditor’s additional, and often higher, interest rates.
On the flip side, production-based loans allow additional flexibility when you’re primarily renting ground, or have not accumulated hard assets often required by other lenders. What’s more, FarmOp Capital loans also give you a larger loan amount — oftentimes up to 100% of your annual cash flow need.
In the Know
If you’re interested in learning more, a FarmOp Capital specialist can help you obtain an operating loan quote by first reviewing your real cost of capital and other lines of credit offered by third-party lenders. FarmOp Capital specialists also will help you evaluate your interest rate and potential, verify pre-application items and collect information on crop plan types, acres farmed, APH and projected yield, insurance levels, total budget, total assets, equity and working capital.
FarmOp Capital specialists know farming. Available when you need them to help you walk through questions and potential problems, they become a partner in your operation.
We’re ready to answer all your “What Ifs?” Click here to receive a personalized Quick Quote from FarmOp Capital.