This holiday, the best gift for a farmer is one they can seek themselves: Securing an early commitment from their lending institution for a 2025 operating, or input, line of credit.

Depending on a farm’s financial strength, an operating loan is used for different things, most often for bulk purchases necessary to yearly operations: fertilizer, chemicals, seed, cash rent paid upfront, and other vital inputs. If your farm is doing well and not under much stress, you may dip into it to help pay for family living expenses, utilities, and the like as needed until payoff.

The more stress your farm is under, the more control the bank may assert over the loan. This might include only advancing funds if an invoice is presented, for example, or a strict limit that does not allow for unforeseen expenses—such as for major engine repair, or underestimating your cost of inputs.

Secure Your Loan Early

November is the time to assemble your materials and make an appointment with your banker, as soon as you have a good handle on your 2024 harvest volume.

There are several reasons to secure a commitment before the end of the year, including the availability of immediate cash to take advantage of input specials. Seed, fertilizer, and equipment dealers want to make cash sales this time of year and are often willing to extend discounts, rewards, and lower interest rates to coax farmers into buying inputs or putting a down payment on equipment in the fourth quarter. (It is not advisable to use an operating loan to purchase equipment or vehicles in full, as this could result in negative consequences for your debt load—you might run out of operating line early or be unable to repay it after harvest.)

Another good reason to secure early commitment: More control over taxes. Having ready cash allows you to buy inputs at a time advantageous to your financial position. If it’s been a great year, you may decide to do more business spending before January 1 to lower your tax burden. Keep in mind, though, if you have not finalized your 2023 income taxes yet, doing this may make you look like a less qualified borrower.

Peace of mind is not tangible like the first two benefits, but I’d argue it’s just as important. The earlier you step up to take control of your financial situation and request an operating line of credit, the more you can influence a positive decision. What if the bank you’ve been using for 20 years turns you down because the loan officer you’ve worked with retired and the new one doesn’t understand how farm income works? Knowing obstacles early allows time to apply at other institutions if necessary. I knew someone who couldn’t plant because the bank put off an operating line commitment even though everyone thought it would eventually approve the loan. The bank decided in late February—less than a week before the farmer’s rent payments were due—that it wouldn’t offer the loan. Because this farmer waited too long on the decision, he didn’t have time to find another bank. It’s always better to be overly prepared.

How To Better Butter Up Your Bank

A bank is a business. It is not your friend, although its employees are often friendly. Banks have regulations about how much risk they can take, so if a regulator views your operating loan as unsound for any reason, your banker is required to take action.

This may mean not granting you a new operating loan. Or, if you have a loan and your bank requires its name to be on all checks made out to you, the bank may refuse to cash them unless the funds go first to a loan payment. If you budgeted that income for rent or a vendor, it may mean that creditor won’t be paid unless they filed a landlord’s lien or otherwise protected their interests in advance.

If you don’t have an “inside man” with the bank to keep you apprised of how things are going behind the scenes—and most people don’t—you may not realize how likely or not it is to approve your loan. If each time you call you are told “I have to check with our main office” but never receive an answer, or you are put with a new loan officer you don’t know, it could be cause for concern.

You can be aware of your balance sheet and debts in such a way to meet with the banker around December 1 armed with the best information to increase your chance at success:

• Prepare a balance sheet and cash flow sheet. If an accountant or financial advisor prepares these, verify them for accuracy. When I was working as a bank lender, I caught a $400,000 mistake on a farmer’s balance sheet made by an inexperienced analyst who simply forgot to make an equipment adjustment.
• Especially in a rough year, document and recheck your numbers for precision. Measure your bin contents and calibrate your combine with an auger wagon to compare. Review last year’s numbers, too—were there actually 25,000 bushels in the bin? When you crossed the scales, did the volume of bushels match?
• Did you forget about a bill from the year before, and pay it with this year’s income? It is a loss, but it’s good to show if it’s just one-time rather than long-term.
• Check with your Farm Service Agency office to find out if there may be an ARC/PLC payment due to you based on market conditions.
• If you experienced 2024 crop losses, work with your insurance agent to document this. As with the FSA recommendation above, being able to show your banker any guaranteed income to offset a shortfall may aid your chances at a new loan (and shows you’re considerate of the bank’s risk).
• Are there ways you can reduce future expenses? Can you negotiate lower rent? Does a soil test show you can decrease fertilizer input next year? Can you purchase seed from a less expensive dealer?
• If you are in deeper debt than anticipated, propose a plan to structure your payments or otherwise discharge the debt so you can show the bank you are tackling your liabilities responsibly.

Know When To Seek Professional Advice

It is important to recognize when you need assistance, and Ag & Business Legal Strategies is here to help. With combined decades of experience in not only law and banking but also agriculture, our attorneys and I have worked with ag operations in all types of situations, so we know what options are available depending on circumstances.

We can help analyze your operation and financials, restructure debt as necessary, and advocate on your behalf with your lending institution. We have never assisted in a situation in which a farmer called us “too soon”—if you have a feeling something isn’t right, heed it sooner than later.

Contact us when harvest is done, or sooner if you can see coming up short on bushels or projected income. The sooner you reach out, the earlier we can help you stabilize your financial position. The longer you wait, even if it’s just until January or February, the more likely you could be out of business come April.

Call Us: (319) 363-1641

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/