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Farmers Should Think Hard about Incurring Debt

November 12, 2010

By Elise Brown, Purdue University

 
In these tough economic times when consumers and businesses are spending less, farmers should think carefully about how much money they want to borrow and how they would use it in their businesses, a Purdue University agricultural economist says.
 
When pursuing business opportunities, debt can be an important tool for business growth, Brent Gloy said.
 
"Opportunities may come up, and you may need to borrow money to go after them," he said. "Borrowing in moderation and using the funds for the right things is very important."
 
Some of those opportunities include investments that let farmers expand their operations, save on costs or improve efficiency, but they also should carefully consider incurring debt because unnecessary expenses can threaten financial security, Gloy said.
 
"Think about what you need, what the return is and what you're risking, and think about that carefully," he said. "On the other hand, you don't want to walk away from things that fit with what you do and that you're capable of handling. Just make sure they are the right opportunities."
 
Finding good business opportunities is usually hard work, but that effort can create wealth in the long run, Gloy said.
 
"Rarely will wealth be handed to you," he said. "You will have to make the investment and then do the hard work of managing the business to capture the value. Building wealth requires sacrifice. In order to build wealth, you must delay or reduce consumption below income generation. This means that you have to make some sacrifices today for the benefit of having more in the future."
 
He said farmers should practice good business fundamentals and worry about only what they can control.
 
"Too many times we get wrapped up in thinking of the big picture and we don't think about the fundamentals of our business," Gloy said. "Start by understanding where you are and what your options are to change where you are."
 
Gloy said it also is important for farmers to know the cost versus return of every business decision they make and what changes in business practices are necessary to increase revenue.
 
Gloy also offered the following management tips:
 
  • Understand the economics of your business. If you have an advantage, always work to increase it.
     
  • Do not be paralyzed by analysis and complication. Do not blindly make big decisions based on faith.
     
  • If you find yourself in financial trouble, address it early and honestly.
     
  • Clearly understand risk and return trade-offs. Don't gamble your financial security for things you don't need.
     
  • Invest in yourself. Your knowledge and talent is the most valuable set of assets that you own. Make good choices here and you will reap benefits for years to come.
 
  • Invest in those around you. There are many talented people in this world. You will clearly be better off if they are working toward helping you solve problems. When you invest in someone else it usually pays dividends down the road.
 

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