Low commodity prices, inflated expenses, and resilient interest rates with no end in sight are causing lenders to zero in on cash flow projections and financial liquidity on the balance sheet.

Positive and negative outcomes on income statements will be a balancing act. The preservation of working capital that was built up during the recent pandemic will be under the watchful eye of agricultural lenders.

Family living expenses

Family living expenses are one of the key areas where lenders will seek clarity and transparency. Oftentimes, excess family living expenses are the culprit for loss carryforwards on lines of credit and can lead to refinancing requests of operating money. A Midwest banker recently emailed me inquiring about what amount to use for family living costs when analyzing credits.

First, keep in mind that the amount of every family living withdrawal is unique to the situation. Some lenders attempt to put guardrails on the family living costs using a formula.

For example, some lenders will use $20,000 to $25,000 for each adult living out of the business and $10,000 for each child or additional adult under care in the household. In this example, a household with a husband, wife, and two children would have family living costs of $50,000 to $55,000 annually. However, an analysis of farm record systems finds that current family living withdrawals range from $60,000 to $100,000.

Earned net worth analysis

Some lenders will conduct an earned net worth analysis to back into family living costs. They will use the beginning and ending balance sheets along with the income statement to develop the analysis. This analysis will often surprise the borrowers when they realize that their living costs were higher than expected.

Keep budgets separate

While the above formula analysis can provide structure, family living costs will deviate about one-third of the time. The following are some of the reasons for that deviation, which can be 30 to 50 percent of normal.

The key is to separate business and family budgets. Then, monitor credit card balances, particularly during extreme economic cycles and in difficult periods.