Understand lending options

By Gary Sipiorski

You may have heard many of the following terms, but it can be tough to understand what they mean for you.  Lenders live and breathe this terminology daily while farmers many only hear the terms once a year.

Here are some of the more common lending “products” as they may be called by someone doing the financing.  Always remember, each lender will have his or her own policies, additional terminologies and methods.  In no way is should this list be considered complete.

Line of credit (LOC)
This generally relates to an amount of money to be used for planting a crop, farm repairs, short-term cattle purchases or just general needed cash. The amount of money made available will be secured with crops, cattle, machinery or real estate. Once the dollar amount is set by the lender, the amount of cash available can be withdrawn when needed.

The LOC may be set for one year and then it will need to be paid in full.  It may have a five-year period of availability and then it may have to be paid in full.  It could be an ongoing line – similar to a credit card – and only require monthly interest or interest and some principal paid on the LOC each month.

This requires some discipline on the farmer’s part in that he or she must make sure the money is used for the purpose that it was intended.  With money sitting in the account, it is easy to ask, “Is there something else I can buy?” In some cases, the available money is used up for other reasons and a new request is made.  Controlling the LOC to make sure there is always money in the account by paying down the account is good business.

Cropping loans (CL)
CLs are made on a once-a-year basis and secured with a lien on the crops.  Generally, they amount to 75 percent of the amount of cropping expenses for seed, fertilizer, custom operations and rents. Some lenders may include fuel, labor and related like expenses.  It is understood that these loans will be paid in full in one large payment at the time the crop is sold or yearend.

Personal property loans (PPL)
PPLs are loans secured generally up to 75 percent of the value of cattle and/or machinery.  They will have payments periods (or better known as amortizations) extending to the life of a piece of equipment. Many times, the cattle loan will extend with payments for a five-year period.  Depending on the age of the machinery, PPLs could have a five- to seven-year repayment schedule.

Real estate loans (RE)
REs will have payment periods of 10 to 25 years. With more buildings on the loan, the repayment may be shorter.  If only land is included, the loan can be extended for up to 20 years or, in some cases, up to 40 years.

LOC to fill cash flow shortages
In periods of low milk prices, lenders may add on to an existing LOC so monthly bills can be paid.  This gives the farmer the ability to stay current with the lender on other payments.  It is a strategy for short periods of six to 12 months.  There will be a limit on the credit added to an existing LOC.  After the low-income period ends, a plan to repay the funds used will have to be agreed upon.  This may mean opening up other loans that have amortization schedules and adding money onto them.

Extended amortizations on loans
An example of this would be a $100,000 loan at 6-percent interest with a five-year amortization would require an interest and principal payment of $1,934 each month.  In a cash flow-tight year, a lender may agree to “extend” the amortization for 10 years.  This would lower the monthly payments to $1,110, freeing up nearly $800 a month to take care of other bills.

Adding money to an existing loan
If a five-year PPL loan was made four years ago, a great deal of principal has been paid on the loan in that four-year period.  A lender may agree to add more money to the loan and then re-amortize the loan or stretch it out for another five years.

Interest-only payments for a period of time
This occurs in low milk price years when the total cost of production on a farm is less than the income.  On a $100,000 loan with an interest rate of 6 percent and a five-year amortization, the monthly interest is $500 and the principal is $1,433.  A lender may agree to only take the interest amount and forego any principal for a period of six to 12 months.  This would free up $1,433 to take care of other expenses.  Other loans that the farmer has could also be placed on interest only.

One can see how this method would free up a lot of cash.  Usually, this requires a piece of paperwork called an addendum to the loan, which is an agreement between the farmer and lender for a period of time.  The downside is the principal will still have to be paid back in the future.  In reality, this will extend the amortization of the loan for the period of time the interest-only period lasts.

This is the third in a series of articles written by Gary Sipiorski to discuss strategies and options with low milk prices.  In the first article, he outlined steps to approach down cycles in milk prices and he addressed ways to work with your lender in the second article.

About the author:  Gary Sipiorski is the Vita Plus dairy development manager.  He grew up on his family’s dairy farm in eastern Wisconsin and attended the University of Wisconsin-River Falls.  Sipiorski spent 17 years with Citizens State Bank of Loyal and worked his way up to president and CEO.  In 2008, he transitioned to his current role at Vita Plus and continues to serve on the CSB board of directors.  In addition, he served on the advisory committee on agriculture and industry for the Federal Reserve Bank of Chicago.  He is also an advisor for the Professional Dairy Producers of Wisconsin and a regular contributor to Hoard’s Dairyman and other agricultural publications.