From my recent discussions with agricultural lenders, it appears that some producers may be playing a sort of “shell game” in order to meet expenses and service debt. That is, as the old adage says, “robbing Peter to pay Paul.” Well, this is very reminiscent of the 1980's farm crisis years. Credit extended from agribusinesses in the form of accounts payable for fertilizer, feed or supplies, continues to increase dramatically. In most cases, this is a symptom of maxed out operating lines of credit.
Some producers have resorted to borrowing from neighbors and peers to maintain their businesses. If this scenario sounds familiar, make sure to follow these few, quick steps for a better peer-to-peer lending outcome.
First, detail the full loan amount as well as terms in writing, with third-party verification. Second, never jeopardize your credit for someone else’s. Some operations are actually borrowing from another farmer’s line of credit without the lender’s knowledge. This can be a very dangerous practice. In fact, most of these situations actually violate lender covenants.
Other producers turned to credit cards, building significant debt at often high interest rates. Many lenders recently observed $10,000 to $90,000 of credit card debt, exclusive of Farm Plan from John Deere Financial and other lines of credit.
Primarily, credit cards used to meet various existing obligations including mortgage debt and inflated family living cost. The current record for agricultural credit card debt is $598,000 on over 90 credit cards. Other desperate producers have used credit cards of their children and spouse, and often without permission. Especially in the absence of a proactive, improvement plan, desperate times can change a personality as one plays the proverbial shell game.
While it is prudent to be cautious regarding the practice of peer-to-peer lending, it has happened successfully. It can be hard to watch a friend or relative struggle financially which often causes stress in other areas of life. However, whether it may be a family member, friend or peer, loaning money is a business transaction and must be approached with that perspective.
Examine first whether the credit extension and or loaned assets will solve the borrower’s long-term problems. In other words, will your financial assistance give the business a reasonable chance at success? In addition, assess the timing aspect of your assistance. Is it a short-term or longer term commitment? Next, determine if this is a one-time problem or a reoccurring issue in the business.
Finally, if assets are pledged, find out if they have any other prior commitments. Interestingly, a basic search of court house public records could save you from a bad situation.
A producer in one of my recent classes in Denver, Colorado said, “If it is not paid for, your hay in another person’s barn is worth nothing to you.” From debt to moral character, an economic downturn can bring challenges of all types. However, graciousness and opportunity are also present. As a producer, whether you are borrowing or lending money, think carefully through the details of any transaction and its impact on the long-term success of your business and livelihood.