Are you land rich and cash poor? Well, I promise you are by far not the only one! Many farmers find themselves in this situation often. Farmers are known for having healthy net worth with often more than 90% of their assets being farmland. Farmers often pour all of their excess cash into improving the land, making debt payments on the land, and making down payments on new land. This helps build the balance sheet and many of them are building a great deal of equity in their land assets. However; there will ultimately come a time that you will need cash or working capital in lieu of thousands of acres of farmland.
Let’s say you are strapped for cash and need working capital to get through the crop year. Why not cash in some equity and acquire a fixed rate loan while rates are low? Wouldn’t it be much easier to get a loan now rather than having to walk in the banker’s door with your hat in your hand because you don’t have the cash to finish your crop?
There is nothing wrong with cashing in some equity to get some cash to just sit on just in case. If you can lock in a low rate for 5 years and get some working capital on hand that you won’t have to borrow on an operating line every year then, why not? Chances are when rates go up the one year rate on your LOC you get from the bank every year will start to creep up as well. The “non-farming” community does this all the time in the form of HELOCS or home equity lines of credit. There are a lot of banks and agri-finance companies offering these types loans – farm equity lines of credits – FELOC just doesn’t roll off the tongue as easy!
Now I must put the disclaimer in here of – DO NOT let this get out of hand! Don’t cash in ALL of your equity at once. You need to always keep a cushion there, negative equity is a very hard problem to have and fix. I would recommend borrowing no more than 30% of your equity total. Therefore, if you have $500,000 of equity then borrow no more than $150,000 in your property if you are borrowing for the sole purpose of keeping cash on hand for working capital. (Opinions on this percentage will vary and you will need to look at your operation in particular to determine the most appropriate amount.) I would consider this properly leveraging your assets, or letting your assets work for you. You just never want to over leverage! If rates start to trend upward, and they will eventually, and you have secured some working capital at a long term fixed rate you will be in a better position. If nothing else you will be saving paying interest at a higher on your annual line of credit and maybe even better than that you will not have to worry about coming up short on paying that line back!
Even if this time does not come in your life time, when you leave this earth your heirs will have the task of creating some cash from your assets. Whether it be to pay taxes, buy out another family member’s share of the farm, or to make improvements to the farm itself. As discussed in other articles properly plan for your future and educate your heirs apparent on what will necessary to handle your assets when you are gone.