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3 tips to use your revolving line of credit headline

By Jordan Harmon, Vice President, Chillicothe Office

Jordan Harmon, Vice President, FCS Financial Chillicothe Office

When asked a few weeks ago what was top of mind for concerns in 2023, a farmer replied, “Prices. And prices.” He was directly referring to commodity prices and input prices, but the conversation quickly moved over to the price of borrowed capital – also known as interest rates.  We’re in the middle of operating line renewal season and there isn’t a conversation going by without at least some discussion around the rising rate environment and what that means for operating expenses this coming year. Below are three tips I try to share with every producer I sit down with. These are good practices every year but more so during periods of higher or rising interest rates.

  1. Be intentional about the uses of your RLOC. A revolving line of credit (RLOC) is designed to provide capital for operating expenses at a time of year when cash is not coming into the operation. In other words, it’s a tool to assist with cash flow timing issues not something to offset cash flow shortages. Use your RLOC for expenses that you anticipate will be paid in that production year. Do not use your RLOC for capital purchases, like machinery and livestock, unless it’s in a short-term situation such as waiting for a term loan to be funded. If you do have capital purchases on your RLOC, talk with your lender to get those moved to a loan with terms and payment that matches the cash flow of the purchase. Visiting with your lender prior to purchasing capital items with your RLOC is always best practice.

  1. 3 tips to use your revolving line of creditDon’t skip the R – revolve your line of credit. Borrowers repeatedly tell me, “I don’t want to pay down the line just to borrow it again the next day.” But the reality is, it’s rarely, if ever, the next day. It’s more often weeks or months before cash is needed again, and, in today’s rate environment, every day that balance is sitting there is costing you money. When cash comes into your operation that should be applied towards operating expenses – put it there. Not only does this communicate to your lending team that you’re operating in good faith, but it also reduces your daily interest cost. The hassle factor of accessing funds and paying funds down is nearly nonexistent with the online tools available through FCS Financial’s My Access Plus, so use the revolving feature of your line to your advantage and the advantage of your bottom line.

  1. Pay off your line of credit – and not just because it’s up for renewal. Ag lenders fully understand the days of having a single season’s expenses cleared before the next season’s expenses start are in the rearview mirror. We understand that you’re making seed purchase decisions for next year while this year’s crop is still growing. It is still best practice to zero out your line of credit at some point during the year, and, given that most operations have a line of credit that is closer to 50-60% of gross farm income (GFI), it should be feasible for most operators during most years. When cash flow is coming into your operation, think about the daily cost of borrowed working capital and make sure to prioritize paying it down. This is especially true in a year like this when the interest rate on your line of credit likely exceeds most of your term debt.  Also, keep in mind the cost of being extended on your line when making the decision to store grain. Don’t allow that cost to dictate your grain marketing strategy, but don’t forget to calculate it either. Finally, don’t rush to sell grain in the days leading up to your renewal just to zero out the line. Your marketing plan should ultimately dictate grain sales, and the cost of borrowing working capital should factor into your marketing plan.

Most importantly, don’t forget the emotional aspect of this environment. I’ve been encouraging my producers to look at total interest rate cost across the operation and analyze it with the same consideration put into every other expense on the farm. Interest cost overall is still inexpensive in comparison to interest rates over time and in comparison to other operating expenses. Interest rates are like gas prices in that we are constantly seeing them, hearing people talk about them, and thinking about them. Sometimes, we respond with more emotion than logic like the guy who will drive 25 miles out of his way to save two cents on fuel. Yes, rates have gone up. Yes, that means overall interest expense will be greater. But, as producers, you’re well versed in dealing with the ups and downs of your costs. Stay connected with your lender, keep in mind these best practices, and before long we will be back to talking about prices… and prices.

Jordan Harmon is a Vice President in the FCS Financial Chillicothe office. With more than 10 years at FCS Financial, Jordan enjoys helping Missouri farmers achieve their goals and living in rural Missouri.​ If you’re looking for an ag lender who understands the ups and downs of Missouri agriculture, reach out to an FCS Financial loan officer today.

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