Author: Derek Fahey, Director of Community Banking
In this article:
- Farming income is seasonal, but expenses are not.
- Input costs like seed, fertilizer, feed and fuel often come due months before revenue arrives.
- An agricultural line of credit provides flexible access to funds when cash flow is tight.
- Producers can borrow what they need, pay interest only on what’s used and repay as income comes in.
In agriculture, cash isn’t always available when it’s needed. An operation may finish a year in the black, but normal daily expenses bleed margins dry by the time a new season rolls around. To cover costs associated with seed, fertilizer, feed, fuel, labor or other operational expenses, farmers can find help from a friend: their banking partner.
What Is an Agricultural Line of Credit?
As a new season rolls around, agricultural producers turn toward commercial bankers, not for term loans, but an agricultural line of credit. A line of credit is a flexible farm financing option that allows farmers to access funds as needed, up to a predetermined amount.
How a Farm Operating Line of Credit Improves Cash Flow
Unlike a traditional loan where preapproved funding is accessed all at once, borrowers draw only what they need, without reapplying each time additional funds are required. Some of the additional advantages of this financial arrangement include:
- Providing Liquidity: As the balance on a line of credit is paid down, funds become available again for future borrowing. This provides farmers with an ongoing liquidity tool to augment savings while eliminating the need to take on long-term debt for short term needs.
- Favorable Interest: This flexible financing arrangement also offers more favorable terms designed for shorter agricultural borrowing. Instead of paying interest on one large lump sum, as would be required with a term loan, interest is charged only on the money borrowed, not the entire approved farm line of credit.
- Financing Options: A line of credit can also be combined with other banking tools for added convenience and maximum efficiency. One example is to pair an agricultural line of credit with a two-way cash sweep agreement. As bills are paid from a checking account, cash is swept from the line of credit to cover current expenses. Likewise, extra funds within the checking account can automatically be swept to pay the line of credit, reducing the balance and saving operations in interest charges.
When Should Farmers Use an Agricultural Line of Credit?
The use of a line of credit offers farmers and ranchers many benefits, including:
- Ongoing Expenses: An agricultural line of credit is advantageous for expenses that arise within a production year, such as input costs, livestock purchases or other short-term billables. It’s an instrument designed to provide cash for operations, while giving farmers an extended runway to repay balances as income comes in over time.
- Financing Major Purchases: It is also a prime interim financing tool for machinery or other capital purchases. Say a farmer is going to buy a new piece of equipment but needs to sell a current acquisition to fund the expenditure. A line of credit can fill this gap, providing necessary cash that can be repaid once the sale of the current asset is complete.
- Increasing Profitability: Storing grain or holding livestock during a soft market can make sense, but while waiting, bills still come due. An agricultural line of credit allows a producer to maintain working capital while holding out for a more favorable selling window.
- Bridging Payment Gaps: It’s no secret that payment for ag products doesn’t always appear when expected. Grain checks, milk payments and livestock proceeds can take weeks or months to be issued. In the meantime, operations must fund payroll, settle supplier invoices and manage other routine operating expenses. An agricultural line of credit bridges the gap, providing cash up front that can easily be repaid when the check comes in.
How to Apply for an Agricultural Line of Credit
Accessing a line of credit is easy with the support of your bank. At FNBO, we take time to understand your needs and analyze your operation. We’ll walk you through the process of gathering the right financials, completing onsite inspections and creating a balance sheet.
With this information in hand, we can help you devise the right line of credit solution for your business and ensure you’re able to maintain liquidity to better manage your agricultural operation.
Learn more about our Agribusiness services or reach out to a banker who specializes in agriculture.
About the Author
Derek is a Director of Community Banking in Mitchell, South Dakota, where he provides leadership to the market and specializes in ag lending. Derek is motivated by the people of Mitchell and their pride in the community.
