May 24, 2016
As American agriculture continues to be challenged economically, the phrase, “willingness to repay” has begun to appear more frequently. Recently, a young agricultural lender asked me to further define the term. Currently in training, she was in the midst of reading various policy manuals and credit analysis publications which use this term but failed to provide adequate explanation.
Undoubtedly, agricultural lenders will increasingly scrutinize a producer’s “willingness to repay” in the coming months. With more producers incurring negative margins, the willingness to repay will be challenged for some. Therefore, a plan B or perhaps, plan C may be needed to meet commitments on a timely basis. These alternate plans might include:
Developing cash flow budgets along with enterprise income statements to determine what options or enterprise combinations could increase the long-term ability to repay.
For others, the elimination of unproductive assets such as, land, machinery, livestock or labor may be needed in order to stabilize the business.
A producer’s willingness to repay could be a simple personal family living budget to monitor outflows of the business earnings along with a reduction of family living expenses.
Some producers may seek temporary or part-time off-farm income as a means of generating sufficient cash flow and servicing debt obligations.
Many producers will need to revise their plans and budgets concerning production, marketing, and finances. The more powerful demonstration of willingness to repay, of course, is in the actual execution of the plan and then, the continued monitoring with one’s agricultural lender or advisor.
One’s willingness to repay is also evident in maintaining opening lines of communications with creditors and business partners. If cash flow becomes short, notify your lender and supplier and then, work together to formulate and execute a plan to correct the negative margin.
As agricultural lenders gain experience and time in the field, they will become increasingly familiar with those that demonstrate a strong “willingness to repay.” Often, those individuals who refuse responsibility and chose to blame others for their difficulties demonstrate a low level of willingness to repay. Additionally, those that are not open to compromise or corrective action may not be firmly committed to their obligations.
A commitment to financial responsibility and is only part of the term, “willingness to repay.” Corrective action strategy and implementation must be in place along with an amenable mindset. Often, it is the behavioral component of this equation that is most strongly tested during an economic down cycle. Many producers naturally tend to be motivated, creative and committed individuals. Those that carry this mindset into their businesses may not only be more likely to service debt obligations, but also to be sustainable and profitable regardless of the economic cycle.
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