Cash Flow Vs. Collateral
“If it’s all about cash flow and earnings, why does my agrilender still require collateral, particularly the land?” This was a question posed to me at a recent agricultural producers’ seminar in Grand Island, NE.
These comments were preceded by the forecast that in 2006 more agrilenders would request cash flow and documentation of earnings with the continuing saga of rising costs and general inflation with suppressed commodity prices.
In recent years many agricultural loans have been made based upon rising land and asset values with little regard to earnings or overall cash flow. In the lender’s defense, competitive pressures and efficiencies are driving this scenario. If you have the collateral backing you, get the loan.
Agriculture is now shifting paradigms where justification of earnings and cash flow will be critical. However, most lenders will require a balanced examination of the financial situation, including review of cash flow, earnings, collateral, character and past credit payment history. This is called performance-based lending.
An agrilender may want more collateral, particularly in land, if there are signs of cash flow or earnings weakness. Land is the most stable of collateral, and thus is often used to back the loan.
On a side note, the producer next to this guy smiled to his neighbor who made the comment and said, “You better step up the earnings and cash flow!”
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Editors' 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.
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