Navigating the balance between farm debt and business growth can be a challenge for many farmers. In a lot of ways, it can feel like a catch-22 – you need to incur debt to grow your farm, but more debt can add significant stress and risk to your current lifestyle.
Many farmers find themselves in this predicament – how do you grow a multi-million dollar operation you can pass down to future generations without passing on the mountain of debt you borrowed to acquire it? While there’s no one-size-fits-all solution, there are a few strategies available that can help.
In this article, we’ll outline some strategies used by our clients as well as point out some important points to factor into your decision making.
Here’s a common scenario: You want to expand your farming operation and you require funding to do it, however, you don’t have it readily available through cash flow, so you take on debt.
Whether you go for a Term Loan to buy more land or use overdraft facilities for working capital (e.g. Livestock Finance), it’s crucial to understand the associated higher interest rates and terms.
Term loans are great for long-term investments like land purchases, while overdraft debt is typically used for short-term working capital and comes with a higher interest rate.
Before taking on additional debt to expand, it’s really important to make sure you can service that debt under different conditions. For example, if we face a dry season and you’ve maxed out your borrowing capacity, you’ll be in a tight spot.
Another important practice is to prepare for potential interest rate increases and check whether you can keep up with debt repayments if rates go up, because while predicting the future is impossible, preparing for worst-case scenarios is always a smart move.
One thing we always look at with our clients before they take on more debt to buy more land is the productivity of their current property. The reason for this is that enhancing the functioning of existing infrastructure could yield higher returns in the short term and help increase cash flow.
In saying this, if a good opportunity arises, such as the sale of an adjoining property, it may be worth your while considering expansion and taking on more debt to do it.
There isn’t a universal method to balance farm debt and business growth. Each farm’s circumstances are unique, so it’s important to get tailored advice from trusted advisors.
By seeking professional guidance and carefully planning your financial strategies, you can effectively manage farm debt while fostering business growth for your farm business.
Balancing farm debt and business growth is a complex challenge, but with the right strategies and expert advice, it’s entirely achievable. By proactively managing your finances, you can create a sustainable and prosperous future for your farm business.
If you’re ready to make informed decisions and secure your farm’s legacy, consult with your trusted adviser today. For personalised advice and tailored strategies, contact us now on (02) 5750 0519 or book an appointment with Matt Meehan here. Take the first step towards a balanced and thriving farming operation and the future you’ve been dreaming of.
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