Boost Your Farm Productivity with Operating Lines of Credit

Boost Your Farm Productivity with Operating Lines of Credit

Make a list of essential ways to boost a farm’s productivity, and an operating line of credit will be on it. The benefits are both tangible and intangible, says Stacy Nobles, a relationship lending manager with AgSouth Farm Credit. He and Allen Daley, a relationship lender with AgSouth, have 38 years between them in helping farmers tailor operating lines of credit that best fit their businesses. 

What is an operating line of credit and how does it differ from a loan?

“An operating line of credit is going to finance the inputs or the upfront costs to produce a product, whether it’s for a crop or for cattle,” says Allen. “It is different from a loan for land or equipment in that it is used to finance variable costs throughout the season. It is basically anything that is needed to produce a crop. This may include seed, fertilizer, chemicals, or land rent, and it is always paid within one year, typically from the sale of the crop. For cattle operations, the operating line of credit might be used to pay vet bills, land rent, feed, and other necessities for a calf crop, and it is repaid when the calves are sold.” 

A farm loan, on the other hand, likely needs to be repaid over several years and may include land purchases, equipment purchases, or financing a cattle herd, for example. 

Why is an operating line of credit an important part of a successful operation? 

There are two major benefits:

1. “It provides the liquidity that farmers need to continue their operations,” says Stacy. “We’re able to loan them the money for the expenses that may go into a crop or other aspect of their operation. Therefore, they don’t have to tie up their money for the expenses, which could severely limit them and the size of their operation if they had to rely 100 percent on their own cash. If we’re able to loan part of that money, that allows them to reinvest their cash into other aspects of their farm operation.”
2. The other benefit, somewhat intangible but no less important, is that it allows the farmer to develop a deeper relationship with a lender. “When you are dealing with operating money or the expenses of a farm, that is the lifeblood of that farm,” says Stacy. “If they cannot get their operating loan, then the entire operation may be at risk. When a lender and farmer work together to set up an operating line of credit, that usually leads to conversations about the total farm operation and how the money will be used to create a profit. “It’s a pretty detailed and deep relationship and I believe the farmer benefits because the lender is another trusted advisor in their circle or network that they can get advice from.”

How are operating lines of credit structured?

Another attractive feature for farmers is the ability to tailor an operating line or note to their business. When farmers work with AgSouth Farm Credit, they have access to lenders with backgrounds and experience in the world of agriculture. That knowledge and expertise along with a farmer’s balance sheet and business plan helps the AgSouth lender to structure operating lines of credit to best meet the needs of the farmer. In this case, that typically falls into one of two options.

Revolving operating line of credit

“Revolving is the key word,” says Allen. “If you pull money out, it needs to be paid back within one year. As long as it is paid back within one year, we can keep renewing it. There also can be multiple draws.” Take, for example, a $50,000 operating line. You may pull out different amounts and can have multiple draws over the course of a year. Say $5,000 for one draw and $25,000 for another. Interest accrues only on the amount you pull out, in this case $30,000, and you would need to pay back the draw plus interest within one year. If you do that, the operating line can continue to be renewed. There can be a balance from year to year so, in that sense, it keeps revolving.

For some farmers, revolving lines can be useful at the end of the year to manage tax liability, either for the existing year or for the upcoming year. “That revolving line can be used instead of having to go get a whole new loan,” says Stacy.

Nonrevolving operating line of credit

Some farmers prefer a nonrevolving line. Row crop farmers, for example, know their variable costs when it comes to expenses per acre, and most prefer to pay off the operating line of credit as soon as the crop is harvested and sold. 

However, neither structure is restricted to only one type of farming operation, explains Stacy. It really depends on the needs of the farmer and the comfort level. In some instances, some farmers have both revolving and nonrevolving lines. 

What size farming operation qualifies?

“Operating lines of credit are advantageous for any size business, and they really help boost farm productivity by providing important operating capital, no matter the size” says Stacy. “We work with small operations that may need only $2,500 all the way up to multimillion lines.”

To determine the amount of each operating line, the lender and farmer sit down together and go over the operation’s balance sheet, making sure it is updated. They will go over current assets such as cash, accounts receivable, inventory of crops, for example, and cash investments for the current year. They will also look at yields, acres, money made, and expenses incurred, along with a projection for the coming year. Other factors may include crop insurance guarantees and other collateral. All this helps provide a picture of the farm’s profitability.

Do young, beginning, and small farmers benefit?

Absolutely. “When just getting started in farming, they don’t have a lot of liquid assets,” says Stacy. “This is a way to help them fund their farming operation, fund their future growth, and not tax all of their liquid assets. In addition, it allows young farmers to start developing those deep relationships with people they trust and people that can advise them throughout their career.”

Often, AgSouth Farm Credit can tap into government programs such as the Farm Service Agency (FSA) to help provide collateral guarantees that may make a loan or operating line of credit possible. AgSouth is a preferred lender for FSA. 

A conversation with an AgSouth lender is a good way to learn more about putting operating lines of credit to work for you and your farm operation. To facilitate a conversation, it’s helpful to keep good financial records and take them to the meeting with you. “That not only helps you make good decisions for your farm, but it also helps the lender,” says Allen “It makes it easier to give quicker and better service.” If you’re just getting started with recordkeeping, AgSouth has resources to help you get on track. 

Do operating lines of credit qualify for the Farm Credit patronage program?

Yes, with any loan or operating line of credit, a farmer buys stock in AgSouth, and that makes them eligible for the patronage benefit. "I don't know of other lenders that are willing to share their profits with their customers,” says Stacy. “It is a huge selling point for us. It creates a lot of loyalty, and it creates a lot of depth in our relationships.”

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