Debt Structure
- Grant Wiese
- Mar 24
- 3 min read
SW Financial Literacy
Debt Structure
Setting Yourself Up for Success
First with proper debt structure.
There was great discussion this past weekend on X (@gwiesefarms follow me there!) around a tweet I had. Let’s review the conversation that unfolded:
The big thing I want to point out here is that we want all expenses for raising the previous crop paid off each year. Obviously if you are not profitable for one or several years, this won’t be the case. One year of losses happens. 2 years and you need to start finding a solution to your cash flow issues.
What we really want to avoid is several years of crop input losses being termed out for a longer period. This is called a ‘Working Capital Injection’ and takes place after 3 years of losses or when your Working Capital goes negative.
It is extremely hard to work out of debt when what should have been a one year loan structure for crop inputs becomes a 3-5 year payment. This destroys your cash flow. Typically, it is better to sell equipment or find ways to improve income instead of taking out this type of debt. Try to fix the problem without terming out crop inputs for greater than one year.
It is fine if you aren’t following the first tweet exactly how I have outlined. Make a plan that works for your operation and stick to it.
I take notes on what my producers plan on doing with their debt levels and equipment upgrades. You might be surprised at how often I am told of the plan Even outlined above. Without these notes being written down by the producer, their plan is often forgotten and thrown out the window during tough times and then you are swimming in debt again.
I can’t argue with JackalopeFarm here. You always have more risk with more debt. However, I LOVE using smart debt to grow. There are a ton of benefits to using leverage to increase land or efficiencies on the operation.
Like for land:
1. Debt payments stay the same while yield and profitability increases of time.
2. Inflation of land values.
3. Tax write-off for accrued interest.
4. Preserving Working Capital, which in a way decreases your risk.
No advice I give works for every operation. Have your own operational plan and work with your lender for a customized approach. Even if that means paying cash for everything.
This is my favorite way to finance a building or livestock facility. There are big tax, collateral, & estate planning benefits to go with a lease as long as the interest rate environment is favorable to seeing the lease through its maturity (leases are a contract to own, you can’t pay them off early).
Be flexible! Use a structure that works for your operation.
If leases are my preferred method for buildings or livestock, then I am always referring grain bin projects to work with FSA. The red tape is a bit more (but not as bad as everyone says), but the extremely low interest rates are worth it. Even if you have the ability to pay with cash!
Conclusion
Depending on the environment, availability of lending products, and changes in interest rates, all this advice could go up in smoke. That is why you shouldn't rely on what I am putting here for general knowledge, but make sure you are working with a financial expert who knows your situation and can find the right fit for your operation's debt levels, risk tolerance, and goals.
Speaking of consultants...
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Have a great week!
Grant
