Skip Navigation
Jill Kohut

Jill Kohut, FCS FinancialUnderstanding credit, and using it responsibly, is important for any farm or ranch, regardless of size.  FCS Financial’s Jill Kohut, Assistance Vice President of Credit, shares four questions farmers and ranchers should ask before using borrowed funds.

  1. Do I need to borrow money for this purchase?

Cash is king. I know this phrase is old but it’s true. Paying cash for things when you can – operating expenses or purchases - offers a lot of benefits. When you use cash, you’re in control and you limit risk to the operation because you don’t have future debt obligations out of future cash flow.

However, don’t forget cash is king! If a purchase is going to use so much cash that it weakens your liquidity (current assets minus current liabilities) to a point where your operation is strained to meet demands, you need to discuss borrowing for that purchase with your lender. During that discussion, make sure and weigh the options of a larger down payment versus a small down payment. Each operation, and its need for cash and current cash position, are different. There are no hard rules when it comes to best practices.

  1. How long should I borrow the money for?

A lot of producers tend to lean towards stretching out debt as long as they can to lower payments. Although there is value in ensuring the length of the loan doesn’t require payments so large the capacity isn’t there to cover them, shortening up debt has a lot of benefits as well. The stated interest rate will often be lower as the term gets shorter, but even more impactful is the total interest paid over the life of a loan.

Ultimately, the rule of thumb you never want to break is not to borrow longer than the expected life of the asset. You do not want to be making payments on something that has no more useful or economic life left. Operating expenses should always be paid in the year the production was completed and farm purchases should be shortened as much as possible while still preserving the capacity of the operation.

  1. What about the timing of the payments?

Farmers do not ask this question enough.  Often, they just assume the payments we assign are the way it has to be.  A good ag lender will work with you on the frequency of payments, matching annual cash inflows to annual payments, or semi-annual cash inflows with semi-annual payments.  But the timing of those payments is not set in stone. Think about when the income will be coming into the operation and ask your lender to schedule the due dates at a time that makes sense with that cash inflow.  In other words, if you don’t sell calves until March, don’t set your cattle payment up to come due in February.    

  1. What if something changes?

A good working relationship with an ag lender who knows your operation is one of the most crucial steps you can take to set your operation up for the successful use of borrowed capital.  With that being said, the most important part of that relationship is good communication – from both sides!  The second something changes, and if you plan to farm very long at all something will, simply reach out.  Let your lender know that you have concerns. Not only will it strengthen the trust and relationship you both have with each other, but often your lender will be able to assist in making some adjustments that can help overcome the challenge you’re facing.

Don’t Miss any updates or news Get Updates

Supporting the future of farming

Over $1.5 million given to local 4-H and FFA organizations

4-H Logo FFA Logo AFA Logo

© 2008-2021 FCS Financial. All Rights Reserved.

Privacy Policy | Sitemap | Whistleblower

Design and Development by Imagemakers

NMLS #: 761836

Equal Housing Lender