Opportunities in farming always exist, no matter the current economic conditions. However, as commodity prices have remained low, you may be watching your operation’s profit margins continue to narrow. The question facing American producers is this: How can my operation take advantage of opportunities that are out there, despite a tight financial position?
The answer is operating credit. In times of tight cash flow, operating credit allows your farm to access the inputs and materials it requires while freeing up working capital for strategic decisions. Here are five ways you can optimize your operating credit line and protect your business from poor lending practices:
1. Project cash flow
If you don’t have a cash-flow projection, one of two things will happen: Either your line of credit will be too large or it will be too small. Neither is good for a business. Credit lines that are to large may accumulate capital purchases that could have a better structure of repayment. A loan that is too small could leave you with too little capital mid-season when opportunities arise. Take the time to examine your budget and your marketing plan to come up with cash flow needs for the year. If you’re not sure how to approach this process, your lender or financial advisor can help.
2. Build a strong relationship with your lender
The more your lender knows about your operation, the better he or she will be able to help with your financing needs. Keep an open line of communication with your lender and speak up early about potential problems or pitfalls. Clueing your lender in on any long-term plans, like purchasing land or new equipment, will also allow you to plan more effectively together.
3. Come to the table with a plan
Potential lenders want to see an operation grow their balance sheet year over year. Growth can be in the form of working capital or equity. But no matter what form it takes, during tough economic times, growth can be difficult to show.
Most lenders who work with farmers understand that even the most productive operations can fall victim to the economy. If your balance sheet has regressed, have a plan on how you foresee rebuilding it. This will go a long way toward helping you secure operating credit, even if your farm isn’t in the strongest financial position.
4. Pay back operating loans as soon as possible
Operating loans are intended to be short term. We recommend paying down your operating line as soon as possible. First and foremost, this will help keep frozen debt off your books. And when margins are squeezed, paying down debt quickly will reduce the amount of interest you pay. Interest saved is direct dollars earned for your operation.
5. Customize your operating loan
Operating loans are built to accommodate your operation and your business cycle. For instance, if you don’t bring your product to market until November, your operating note shouldn’t be due at the beginning of October. At Farm Credit, we sit down with farmers to truly understand their businesses so we can structure their operating loan in a way that is helpful, not burdensome.
In more profitable years, many farmers prided themselves on never using an operating line. But today’s challenging economy and tight profit margins may mean it’s time to consider what opportunities operating credit can open up for your operation. Talk with your lender to identify credit options that will work best for your farm.