Challenging financial times come and go as part of the natural cycle of agricultural businesses. While this familiar pattern is decades-old, today’s financial tools provide new opportunities, as well as perils for the unsuspecting farm business.
More than 12 years ago, we began to see farm balance sheets with accumulated credit card debt of many thousands of dollars. This current, unsecured debt is showing up in both the farm business and personal columns of the balance sheet.
While unusual, these balances can approach and pass the $100,000 mark. A frequent “fix” for a farm with some unencumbered assets is to roll the credit card debt “down” the balance sheet into an intermediate or long-term loan with scheduled payments…using livestock, machinery, equipment or land as collateral. Caution: Is it in the best interest of the family to take unsecured credit card debt and to secure it with farm business assets? It may be wise to obtain some financial or legal advice before making this kind of a decision. Furthermore, will the underling problem(s) be addressed with this refinancing “solution”?
While forcing the farm to make regular payments to pay off the credit card debt, this “fix” may only briefly take care of the problem of high interest rates, late payment penalties and, possibly, calls from collection agencies. Before taking this step, the farm’s management team has to ask: why was credit card debt accumulated? Has the underlying problem been identified? Can it be fixed? How will it be fixed?
Why are credit card balances accumulated? There are many reasons, and they will vary from farm to farm. Business reasons might include depressed commodity prices, increasing input costs, insufficient operating capital (pre-planned lines-of-credit), inefficient or unprofitable business operations, a farm trying to support too many families for its’ scale of operations, etc.
Personal reasons might include living beyond the available family living dollars, unexpected medical events, poor planning (or no planning!), or an unclear understanding of smart use of credit cards.
To help understand the use of credit cards for both personal and business expenses and the implications of credit card use on credit reports, credit scoring and other business factors, we begin our “Credit Issues for Farmers: What is in the cards?” series.
Look for future articles addressing the basics of credit cards, credit reports, credit scoring, minimum payments, and strategies for managing credit card debts.