With the ups and downs of the market come an unsteady cash flow. This is something most producers understand all too well, as a volatile market is typical for agriculture.
Phil Young, AgCredit Said It podcast host and account officer, says a line of credit (LOC) is like a credit card.
“By having a line of credit, you can take advantage of opportunities when you see fit, like purchasing inputs for the next crop season when prices are lower or having the flexibility to purchase feed when you need it,” he says.
According to independent dairy financial consultant, Gary Sipiorski, producers need to make sure they understand the terms when it comes to when and how the interest is calculated.
“The interest rate on a LOC normally changes monthly,” he says. “It is a variable rate.”
Sipiorski also says producers should ask their lender the following questions.
Will the LOC have to be paid in full by the end of the year? Does it then have to be renewed?
- If the LOC rolls from year to year, when does it mature?
- What is the agreement with the lender as to how and what purposes is it to be used for?
Curtis Gerrits with Compeer Financial offers the following do’s and don’ts of a line of credit.
Do’s of a line of credit:
- In times of tight cash flows and decreased income, utilize your lines of credit as an extension of cash flow to stay current with your vendors and operating expenses.
- Set up automatic and regular payments to be applied to your lines of credit to ensure payment down on the principal balances. This will also allow for the availability of funds in times when they are needed.
- For tax planning purposes, use your lines of credit to prepay expenses for your next fiscal year. This can assist with tax liabilities and may also create opportunities for early discounts with some vendors.
- Monitor your lines of credit closely, just as you would your checkbook. Have a good understanding of what you have applied to your line of credit, along with when and how much you can pay down. This will better help your planning for future months and keep the accrued interest at a minimum while utilizing your lines of credit.
Don’ts of a line of credit:
- Do not use lines of credit when cash is sufficient for operating expenses. Avoid creating additional operating costs from increased interest expense when it is not necessary.
- Do not defer to interest-only payments with your lines of credit. Set up regular and automated payments to pay down principal balances. You can always pull funds back from the line of credit if needed.
- Do not use your lines of credit for purposes they are not intended for. This will ensure that funds are available when you need to utilize your lines of credit for their intended purposes.
Lines of credit are a great cash flow tool for both starting farmers and well-established producers. Leading financial experts underscore the importance of farmers understanding the do’s and don’ts that will help them during the downside of the rollercoaster markets they have gotten to know.