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Corn+Soybean Digest

Financial Numbers for Credit Denial: Part II

In part I of this article, we examined repayment ability. If that factor is not feasible because of drought, low prices, high costs or bad luck, then the ag lender will look for backup. They will evaluate the working capital.

Working Capital
Working capital is not the balance in your checking account. It is the current assets minus current liabilities that must be paid within the year. For example, if current assets are $200,000 and current liabilities $100,000, then the net working capital is $100,000. This would equal a two to one current ratio, which is frequently viewed as positive. Some lenders will divide working capital into expenses or revenue. For example in the above scenario, if farm expenses were $500,000 then net working capital would be 20% of expenses. This means the producer could use $1 of $5 to pay expenses without disrupting normal operations.

Insufficient Repayment Ability
If you have insufficient repayment ability and this number is negative, then there may be a strong probability of denial. This particularly applies to those producers carrying larger amounts of debt, or those with a history of volatile income streams.

Current Ratio Less Than One to One
Current ratios less than one to one can also be a red flag to lenders. Ratios under one to one often mean that producers are unable to pay off debts as they come due, especially if profitability and cash flow are questionable.

If working capital is declining in strong economic conditions such as today’s grain industry, then this will send signals to the lender that more discipline is needed in the working capital area.

Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at
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