By Shaun Haney
There are very advantageous financing programs out in the market right now for inputs (seed, crop protection, fertilizer) this winter. These financing programs may include do not pay or no interest until a given date. These can be fantastic programs for farmers but you need to be careful. You do not want to lock yourself into an agreement that is going to end up costing you more money in the long run. Here are some questions to ask yourself and your retailer this winter as your book your seed, fertilizer, and crop protection products.
Will this input financing agreement be in violation of my covenants with the other lending institutions I use? For example, the covenants that you have on your operating line at the bank. Many agricultural bank loans have some fine print that refers to input financing lending as being a breach of covenant even though it is extremely common in the industry for farmers to use third party input financing. It may be a good idea to get your bank to issue you a letter stating that they excuse you of this clause pertaining to third party input financing just to be safe. You do not want your banker to pull this rabbit out of his hat if your relationship goes awry.
Are there are up front fees or administrative fees? I don’t mean to avoid these sorts of costs all together but make sure you are aware of the total cost of the financing arrangement. If the agreement is do not pay for 12 months and you have to pay 5% up front, this is not that bad of a deal if you need to stretch your payments out. Sometimes you need to pay an up front fee to get very attractive payment terms, interest rates or duration terms. Administrative fees are usually used to provide the retailer with a commission for booking the financing or act as a replacement for interest in no interest or do not pay programs. Whether you are buying seed or a TV, many programs require you to drop some cash up front to benefit your cash flow statement.
Once the interest starts calculating, is the interest owed back dated to the beginning of the contract or does it start fresh? This can get many farmers in a real pickle and is a common trick used when you finance furniture or appliances. If the interest is backdated it is much more expensive than if the interest starts fresh. What I mean by the interest starting fresh is that the interest will not start calculating until payments are actually due. While you are talking interest with your retailer be sure to ask him if the interest changes throughout the contract and if it floats with the prime rate.
At the end date of the contract, can I extend the agreement or is the full balance owed at that time? Some input financing agreements function as lines of credit once the do not pay or interest free period expires. This can be advantageous to you if money is tight and you need to monitor cash flow until you can sell some of your harvested crop. Financing programs that essentially function as a line of credit really allow maximum flexibility and allow you to pay down the principle based on the revenue periods of your farm.
Is there a limit on the account? Some programs have very attractive rates and payment terms but may have very low credit maximums. For some seed purchases this may be okay but for fertilizer or crop protection it is not going to go very far. Make sure that you have enough credit in order to make the right decisions. Cutting back on fertilizer rates to save money may end up costing you more in the long run. If the credit limit is low the other possibility is to use some cash and pay some of the cost with cash and the rest run through the financing program.
What information will I have to supply to set up the account initially? For those of you that do not feel good about sharing your statements it may be a good idea to actually ask this question first. If you do not like to share your statement it may be best to ask how much credit can you get before you have to provide an updated income statement. Be sure to not get defensive and offended if your retailer asks for a statement or a credit check to set up an account. How much money would you lend to a neighbor without the pertinent information?
Input financing programs can definitely be advantageous to your farm if you ask the right questions and use them properly. It should be noted that the credit program should not be the base of your purchasing decisions this winter. Try to avoid strictly buying certain brands because of the financing options. When it comes to seed and crop protection products let the quality of the product be the driver and the financing package a complement. Purchasing an inferior product because you don€™t have to pay for twelve months is not a great business decision at all. Be sure to have a financial plan that accounts for you having to pay off the program you are signed up for. There have been many farms that have gotten themselves into trouble by overextending themselves and not making payments when they should. A credit program is not something that should be abused but properly used to ensure that you have adequate cash flow at the right times to run your business successfully.