Breaking Free from Farm Debt: Expert Advice

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Starting a farm is very expensive, from buying a piece of farming equipment and materials to transportation and development. Therefore, many get a loan to start farming, which they have to repay while still at their most vulnerable — the startup phase. That means never giving the farm a fair opportunity to get up and running because the following thoughts will be running through your mind:

  • How much debt do I owe?
  • How can I get the best rates?
  • Floating rates or fixed rates?
  • Which loans should I pay off first?
  • Should I choose short-term or long-term financing?

Unless you’re debt-free, you will probably spend time thinking about managing farm debt and its interest. Farm debt is the primary stressor. So if you find yourself in a financial situation where you’re having an issue paying the money you owe, here is our expert advice on how to break free from farm debt.

Create a financial budget to reduce farm spending

You need to assess your financial situation and create a farm budget. Budgeting is a perfect way to track the amount of money coming in and out of your farm. The goal of a financial budget for your farm is to make sure you know what you’re spending, and try to have more money coming in, than out.

Look for areas where you can reduce your farm spending and put that money toward paying off your farm debt. Even on an organized farm, there are areas in which you can cut expenses and free up more cash to deal with your debt load. This will help you chip away at debt faster and build momentum.

Refinance for a lower interest rate

After creating your financial budget for your farm, you might be searching for ways to lower your monthly interest rate. First, consider refinancing your farm loans into one if you have other loans. This will keep things more organized and provide a lower interest rate than standalone loans.

A lower interest rate on loans will result in lower monthly repayments, which may lead to a lower overall cost for your farm loan. Depending on your financial situation, you can shorten your loan term to cut the total loan cost even more.

Extend loan repayments with a longer amortization

You can call your lender to discuss extending your amortization schedule and loan period. For example, you can refinance your farm loan into a longer term by taking a 15 years loan term and stretching it to 30 years.

This will lower your monthly payments, but you will have to pay more interest during the loan period. While this option is more costly, it’s best if you can’t make monthly payments or have cash flow issues.

Consolidate multiple farm loans with refinancing

Consider debt consolidation if you have several farm loans and have trouble repaying them. This involves restructuring your farm debt. First, a single lender pays off your other farm loans — and then you’ll repay the total amount of this loan to a single lender.

You can consolidate different high-interest loans for farmers into a single payment, making it easier for you to manage and repay your farm. Sometimes, your debt consolidation farm loan may also have a lower interest rate, which will help you save money on debt repayment.

Sell capital assets to reduce farm debt

A more fast-paced way to pay off farm debt is by selling some capital assets and using the proceeds to pay off your farm loans. Sell capital assets such as land, equipment, and machinery when those assets are selling at favorable prices. This can be a difficult decision, but it may be worth considering if it is necessary to reduce your overall farm debt burden.

But remember, you might have to pay taxes on any depreciating assets you sell. Therefore, before making any decisions about selling capital assets, consulting with a financial advisor or accountant is essential to ensure that the sale will not have any unexpected tax implications. Additionally, it’s also crucial to consider how the sale of these assets will affect your future operations and profitability.

Sell inventory to pay farm debt

Your farm may have accumulated substantial inventories. Make a list of all the items you have on hand that you can sell to pay off debt. This includes crops, livestock, machinery, and other assets. Although selling inventories when prices are rising may not seem appealing, it may be a reasonable option to break free from farm debt, particularly if the stress is intense.

Selling inventories also help eliminate storage and other inventory maintenance costs. Remember that the funds you receive from liquidating inventories that you produce will be taxed unless expenses or deductions are available elsewhere to counterbalance your taxable income. Cut expenses wherever possible. Look for other ways to reduce the cost of running your farm, such as reducing staff or using more efficient equipment.

Get Help Managing Your Farm Debt

One of the easiest ways to manage your farm debt during times of financial stress is to identify it early, so you can take action and work toward a resolution before they become serious. To reduce your farm debt, you need to make a plan and work your way through it. But to make that plan, you’ll need to understand the type of farm debt you have, your best strategy to reduce your debt, and how to leverage your knowledge so that you can increase or maintain your credit score.

Here at United Farm Mortgage, we offer farm credits to help farmers keep up with the costs of running their farms. Whether you want to grow your farm operation, manage day-to-day operational expenses, or take advantage of a new opportunity, we can help you access the financing you need. We’ll keep you involved with the process when you work with us. Contact us for information about financing for farmers if you need funds for land acquisitions, farming equipment, refinancing, or other farm projects.

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