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cornfield with young corn plants
FOLLOW UP: Taking out a mortgage on debt-free land may not be your best long-term option. If cash flow is tight, talk to your lender again.

Time for honest, open conversation with lender

Profit Planners: If your lender is concerned with your financial situation, perhaps it's worth a deeper look.

We secured an operating loan for 2020, but our lender seemed nervous. He says our working capital ratio is only 0.12. Should I take a mortgage on 160 acres that are debt-free so I can still pay for inputs when I want? Will that affect taxes or how the lender views us?

Profit Planner panelists include David Erickson, farmer, Altona, Ill.; Mark Evans, Purdue University Extension, Putnam County, Ind.; Jim Luzar, landowner and retired Purdue Extension educator, Greencastle, Ind.; and Steve Myers, farm manager, Busey Ag Resources, LeRoy, Ill.

Erickson: Have a more in-depth discussion with your lender before you do anything to further jeopardize that relationship. Build your working capital through strict cost management. Your lender is in the best position to help you understand what needs to be done before it’s too late.

Evans: The term “working capital ratio” is also often called “current ratio.” It’s the ability to use current assets to pay current liabilities — short-term debt. A 0.12 current ratio is low, and suggests one is rather extended with short-term loans or short on liquidity. Land isn’t a current asset. Debt for land acquisition isn’t a current liability to be calculated into the working capital ratio. So, you could take out a mortgage to generate cash for inputs without lowering your current ratio. However, doing so would lower the equity percentage of your operation.

It’s important to have discussions with tax and financial professionals before taking steps. Ask your lender if the mortgage would help relieve nervousness. Perhaps cost would be different for an equity line of credit relative to an operating loan. From an accounting viewpoint, be consistent and use standard operating procedures where there may be more than one acceptable method.

Luzar: Positive working capital means you can cover expenses from cash and inventories, not by borrowing more funds. Ask your lender or accountant for a clear explanation of your working capital position. Don’t own an upside-down financial statement — that’s one you read upside down while your lender studies the numbers!

Working capital is the blood pressure of your business. It tells how much risk exposure you’re experiencing, but can’t by itself identify financial problems, including low profitability or incorrectly structured debt. Your poor working capital position requires further analysis.

I don’t feel comfortable raiding the piggy bank of the 160 acres to meet short-term goals. Frank discussion with your lender is needed to develop a plan to improve working capital. More cash gleaned from a land mortgage could perpetuate financial problems.

Don’t feel like a different lender is the fix. Tight margins are creating working capital issues, and most lenders are facing similar concerns.

Myers: There’s a great deal to unpack here. Working capital to gross revenue represents liquidity. It’s considered strong above 20% to 30%. Below that suggests financial stress, but that is but one measure. The knowledge that you own 160 acres debt-free is important. If liquidity is this tight, factor in repayment capacity of that mortgage loan along with other cash needs. Details, like the size of the operating loan related to the impact of borrowing against land, are missing. Have a deeper conversation now with your lender to see what they consider as your best options.

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