Waiting to Act Only Exacerbates Financial Problems
Farmer spouses who keep the operation’s books might not be spending long hours in the field or barn, but the time they devote to the financials can just as easily make or break the family business. The spouse manager must be proactive should they see expenses outpacing income. Debt can accumulate rapidly and could, if not addressed promptly, lead to severe financial problems, including bankruptcy and even loss of the farm. Knowing financial crisis warning signs is an essential skill every spouse manager must possess. Of course, this is easier said than done.
Some spouse managers aren’t able to devote the time it takes to thoroughly scrutinize the farm’s budget and bank statements because they have second jobs or assist their farm spouses with the physical farm labor. They also might have limited accounting training and find it difficult to think beyond the next month’s bills. Oftentimes, these time-stretched spouse managers seek a short-term solution to a long-term debt problem. Instead of thinking, “What is my long-term plan to pay off this debt?” they are thinking, “How can we get next year’s crop in the ground? How can we just get by?”
At Ag & Business Legal Strategies, we’ve seen a lot of cases where these short-term solutions involve working with lenders who charge high interest rates. The farmers get the money they need now, but the repayment terms are horrendous, leading to even greater financial stress. Resorting to high-interest rate loans is a tell-tale sign that creditors label you as a bad credit risk. In contrast, a good credit rating is a positive sign of financial health. Resorting to expensive financing is one of the warning signs of a financial crisis.
Financial crisis warning signs
How can a spouse manager know when their farm is approaching a financial crisis? First, look at the farm’s financial statements for the last five years. If you don’t have financial statements, that’s a financial crisis warning sign—how can you know how your farm is doing financially if you don’t even have the information? If you see negative cash flows for three of those years, that’s a financial crisis warning sign. If you see consistent positive cash flows but current liabilities are at or exceeding them, that’s a financial crisis warning sign too.
Second, review your tax returns. If you owe taxes you’ll need to take swift action to work out a payment plan. Not being able to pay your taxes is a financial crisis warning sign, and not getting your taxes filed is a red flashing financial crisis warning sign.
Finally, are you rolling over vendor financing or input loans for next year, getting cash advances from questionable lenders, or selling or pawning items to get through? These are all financial crisis warning signs too.
Many farmers think that if they’ve got money in the bank they’ve had a good year. If that’s your only metric for financial stability, you’re not looking closely enough at your overall financial picture and you may be missing financial crisis warning signs.
From bad to worse
If farm debt is not dealt with in a timely manner and becomes a financial crisis the consequences can range from bad to catastrophic. First comes default interest. Suddenly your 6% bank loan becomes an 18% interest loan, and your already-too-tight cash flow breaks. Next comes legal action. Creditors will sue to collect from you or seize their collateral, like your crop and machinery. Many banks require their borrowers to maintain bank accounts with them, and if you get behind with them they can seize the money in the bank account, money dedicated to pay your mortgage, go on a vacation, or put food on your family’s table. Finally, once the lawsuits start creditors get judgments against you. That means even creditors that didn’t have liens on your land can get them. Creditors with judgments can then foreclose on the land and the farm can be lost.
The time to act is now
If a spouse manager spots financial difficulties they need to have a conversation with the farmer spouse sooner rather than later. While these can be tough conversations to have, they are essential to the farm’s continued health. From there, getting professional advice is key. It’s important to know where help and resources are available, including the Iowa State Extension and Ag & Business Legal Strategies. Don’t rely on your banker—their job is to take care of the bank, not to ensure your farm survives and thrives.
Once both spouses know and agree a financial crisis is looming the first step is to consider your assets and farm practices. Do you need to sell the livestock? Do you need to downsize the equipment line because you are farming hundreds of acres and not thousands like before? What do you need to do to bring your balance sheet into line? Do you need to take or defend legal actions—filing lawsuits, defending lawsuits, filing bankruptcy—to ensure your farm’s continued survival? Ag & Business Legal Strategies can help you with this analysis. Once you’ve completed this analysis, you, with your advisors’ help, will create a plan to address the impending financial crisis and execute that plan.
The two most important things to remember are to act early and not panic. The longer you wait to ask for help and act the bigger the problems get, and the options for solving them get smaller. Waiting won’t make financial problems go away. The good news is that there is usually a way out, and panic is unnecessary. Joe, Ag & Business Legal Strategies’ founder, took farmers through bankruptcy in the ’80s who are thriving today because of it. Act early and don’t let panic freeze you up or drive you to make rash decisions.
If your herd came down with a disease you’d call a vet early; if weeds appeared in your crop you’d call a chemical supplier at the first sign. If you see financial crisis warning signs in your farm call the experts at Ag & Business Legal Strategies right away to help you address it.
At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy.
Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow.https://www.ablsonline.com/contact/