Are You Willing to Repay?

By: Dr. Kohl

The phrase “willingness to repay” may be simple, but it has powerful implications in today’s challenging and changing agricultural economic environment.  Referred to in agricultural credit training manuals, the willingness to repay is viewed by many seasoned lenders as a critical factor in accepting or denying credit. In one of our recent Farm Credit University courses, a young lender wanted the instructor team to expand on this variable and provide a more definitive meaning. Exploring this concept in depth, there are several ways to ascertain whether you, as a borrower, are a good bet for repayment.

Compared to input costs, commodity prices declined at record rates which resulted in negative margins for many producers. This scenario will continue to test the willingness to repay for some.  Often, the willingness to repay in this type of environment requires generating additional income, either on or off the farm.   Others will make the sacrifice by budgeting and executing reductions for family living and personal costs. 

Sometimes the repayment of debt in tough times requires one to seek and accept consult.  Work side-by-side with your lender or a team of advisors to develop improvement  strategies for profitability.   The real test for borrowers is their ability to execute on the improvement strategies and then, monitor progress. 

In today’s world of negative margins, requests for refinancing operating monies to longer-term debt are very prominent. The proactive producer will develop a written plan of changes to be made as well as how they will be implemented in order to ensure repayment. Often, this plan follows the S.M.A.R.T. principle which stands for specific, measurable, attainable, rewarding and timely.

Another component of the commitment to repay is avoiding unexpected major capital purchases. In addition, utilize credit for its intended purpose.  Operating money is intended for everyday variable expenses.  Using this money for capital purchases or to place a down payment is a very good way to weaken the business relationship with your lender.  Additionally, this misuse of funds often hinders the long-term ability to repay specifically, if the operating line of credit cannot be zeroed out at the end of the year or at the end of the terms of agreement.

Sometimes improving the ability to repay requires difficult decisions. For example, it may be necessary to drop an unprofitable enterprise even if it is one of passion.  Other instances may require shedding unproductive assets such as, land, machinery, livestock or that “killer toy” acquired during the good times. Even more challenging could be cutting unproductive human assets in labor or management; particularly if it is a family member.  Nevertheless, unproductive assets can be a significant factor in overall profitability. 

It is said that when economic times are good the worst mistakes are made.  This statement is true because when financial management is not a top priority, complacency often occurs.  Proactive managers stash a reserve in the form of working capital or even cash for those economic rainy days.  These producers usually not only have the willingness to repay but the means as well.   

Finally, the willingness attribute is sometimes in the form of communication. Maintaining open conversations in adverse times can greatly aide in working through problems concerning timely repayment. Generational transitions for both producers and lenders are accelerating, which will require a commitment to learn and educate on both sides of the producer-lender relationship.   

Whether a lender or a producer, it is important to evaluate the level of commitment to debt obligations.  In this challenging economic environment, producers may require additional capital.  If this is the case, as a producer, you want to be a good bet for repayment.  Strong principles along with a commitment to obligations through business and personal sacrifice will always be high on the list of attributes considered by lenders.  Using available resources and support, assess your income, assets, expenses and goals to revise and update your strategy for long-term success and profitability in today’s agricultural industry.