Farm lenders don’t just care about the terms of your operating loan or the working capital you have at your disposal. Instead, they’re also paying attention to how you use credit cards and other forms of consumer debt as planting season gets underway across the Corn Belt.
“Credit cards and student loans aren’t often a material impact, but we have had some customers in times of good grain prices who went out and built large homes, rental homes and bought expensive cars and boats, says Daniel Taylor, vice president of retail credit underwriting for Farm Credit Mid-America. “I don’t think consumer debt is at a level of concern right now, but it can be an area where it’s easy for producers to get into trouble.”
In some cases, producers who have a difficult time getting an operating loan turn to credit cards to finance inputs, Taylor says, which can be detrimental. Credit cards can have interest rates ranging from 10% to 20%, higher if a payment is late.
More common are producers who open an account with their local input supplier through a store financing program. Some offer a 0% trial period. In some cases, producers who open an account fail to pay it back, resulting in substantial debt up to $100,000 that is owed to suppliers.
“It’s split operating financing,” Taylor explains. “Producers can start to use those accounts to bridge those cash flow shortfalls rather than going back to their primary lender.”
Taylor recommends producers focus on shoring up their farm finances and figuring out their monthly and annual cash flow. Working with their primary operating lender, producers should avoid situations where they can suddenly run up large amounts of debt because of out-of-control interest rates and misunderstood account terms.