Ag operating loans: What are they and how do you get ready?

For a farmer, the annual task of renewing an ag operating loan can be a challenge. But when market conditions are as tough as they are, just the thought of meeting with a lender can make your blood pressure rise with anxiety, especially if you’re new to this. To help, we’ll take a look at the basics of the ag operating loan, what you need to bring, and why it’s critical to work with the right lender.

What is an ag operating loan?

An ag operating loan is the lifeline for your farm. It’s typically a revolving loan, a line of credit that lets you borrow money to purchase inputs like seed, feed, and fertilizer, as well as labor and tillage to keep your operation humming along.

With few exceptions, most ag operating loans are subject to an annual review. That’s because this is agriculture, and nothing stays the same for long. The cost of inputs and the market prices are in constant fluctuation. That affects how much capital you’ll need and the amount you can cultivate on your farm in the coming year.

Ag operating loans are designed to meet the unique business model of ag producers. Instead of monthly installments, farmers pay off these loans annually once they sell the crops, livestock or other commodities.

Another benefit is that ag loans offer bankers the ability to provide personalized services. No two operations are alike. Two different farmers can have two very different plans for their operations. In the wake of fluctuating market conditions, the effects may differ from producer to producer.

What do you need when renewing an ag loan?

Being prepared is critical. When it’s time to renew your loan, it’s so important for farmers to maintain detailed records of their operation, not just at renewal time, but year-round.

Your goal is to present a financially viable plan that will show you have the ability to pay back the loan that you are borrowing. While the current market conditions will be one thing that weighs in the balance, they’ll also be looking at past performance and other conditions that affect your bottom line.

These are some helpful records to bring:

  • Tax returns
  • Profit and loss income statements
  • Last year’s crops
    • overview
    • yield and yield history
    • income
    • income delays (for tax purposes)
  • Financial statements
  • Accounting of all loans, including the terms and payment history from the past year.
  • Year-end balance sheet, including:
    • Accounts receivable
    • Accounts payable
    • Inventory for grain and livestock
    • List of buildings, machines, and other assets along with acquisitions and sales.
  • Preliminary budget and cash flow for the upcoming year, which includes:
    • Planned production, acres and yields
    • Marketing plan
    • Anticipated inputs

Provide a narrative

During your meeting, a lender will ask many questions, because they want to understand the rationale behind your decisions, and how you’ll work with the challenges.

Going over your plan and finances, think about some of the top questions that may come up with your lender. Being proactive can help your lender come to the meeting with a better understanding of the unique circumstances of your operation, and how you’re managing these and other risks that may be associated with your farming practices. No need to write five pages, single-spaced. Just a quick summary with crucial details will do. Here are a few suggestions:

  • Circumstances and issues encountered in the past year and how they were handled.
  • Top accomplishments in the past year. If any move the needle on short- and long-term goals for the operation, even better.
  • Owners and managers of the operation. Include their share of the ownership and the management structure. Note any changes in the past year.

Bottom line, the easier it is for your lender to understand your operation, the simpler the process will be. Taking time to improve your record-keeping abilities will be well worth it. Ready to get started? We've got you covered. Check out our ultimate list of resources for financially savvy farmers.

When is it time to change lenders?

Not all ag lenders are alike. While many banks offer ag lending, they may prioritize commercial lending and other business over agriculture. Ag lending comes with its share of complexities and challenges, and when you work with banks that aren’t focused on ag, they may not take as much time to give you the personalized service you need to succeed. This becomes apparent when market conditions get tough.

That’s why many farmers find their best bet is working with an ag-focused lender that understands the farm space.

  • Is your ag lender well-versed with market trends, current events, and the ups and downs that farmers like you are facing?
  • Do the ag lenders, as a group, have personal ties to agriculture? Many great ag lenders are working producers, but others grew up doing chores on family farms. It helps when you’re working with professionals who "get" your challenges.
  • Is your ag lender committed to your success? Good ag lenders are more than fair-weather friends when times are tough. They understand the cyclical nature of the ag market and will take time to help you explore all your solutions.
  • Can your ag lender grow with you? If you’re planning to expand in the future, make sure your bank has the resources and capital. Ask about their ag lending programs, and how it fits in with their overall volume of lending.  

You know your operation best. The ag lender’s role is not to tell you how to farm. They’re there to evaluate whether your production plan is a good loan risk, and help you find solutions to get it there. Be prepared and patient; the work and rigor that goes into the process can pay off with a stronger operation. 

At Minnwest Bank, our ag lenders are members of your community, and we're committed to helping your farm thrive. Schedule an appointment today

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