Interest, Growth, and Leases
- Grant Wiese
- Jan 5
- 4 min read
SW Financial Literacy
Interest, Growth, and Leases
I get a lot of questions sent my way, and I love getting these! My response time might not always be the fastest, but it is great to hear from producers with specific operational challenges they are experiencing along with general questions about the direction they should be heading.
The best way for me to think outside the box and possibly have to do a little bit of additional research is when I get questions from producers. These conversations help us learn at a much deeper and more valuable level. Please, if you have question around borrowing money, loan structure, balance sheets, cash flows, etc., email me at grant@farm640.com and I will do my best to answer in a reasonable timeframe.
Here are some recent questions I have replied to around interest rates, growth, and leases. Enjoy!
Steps to Own Land
Q: I've just finished my first-year farming on my own, starting with nothing, no family help, working with older nonrelated landlords. This year I farmed and bought some equipment all in cash. What's the best series of steps to help set myself up to own land and maintain profitably?
A: Getting started will be a balance act. A balance between using cash on purchases to reduce debt obligations (and maintaining profitability) and using smart debt to be able to buy into investments you don't have enough cash for.
The best series of steps might include:
Put a 5 year operational plan together. What will you need to buy in what year and how long can you hold off before making those purchases?
Pay very close attention to your margins. If you aren't making money right now, there is no reason to concentrate on growth.
Run every large equipment purchase and land opportunities by a trusted ag lender so you can use the appropriate balance of cash and debt for those purchases. If you don't have a trusted ag finance lender, start interviewing to find one!
Competing with Established Operations
Q: As a younger and smaller farmer what are my best ways to be able to compete with the larger farmers around when margins are tight.
A: Sweat equity! Your competitive advantage is time and energy. Larger operations will look over land deals and business opportunities that need a lot of work. This is exactly how I bought my first farm. It was a property that was difficult to farm and needed a lot of work, but I was able to add acres and make it more valuable. I then use the 1031 like-kind exchange to convert the sweat equity I built up from this property, sell it, and buy a bigger/nicer farm.
Start here and find new ways to generate more income for your operation.
Managing Growth
Q: How to manage growth opportunities without stressing the rest of the operation. How to scale?
A: This is a great question, and it is a balancing act between managing your cash position (working capital) and debt levels (cash flow or margins).
Every purchase or growth opportunity needs to be closely scrutinized to determine the right amount of cash vs debt to be used on the purchase. Using too much cash or debt and the wrong time can put your operation back for years as you dig out of the hole you made.
Are you a younger producer looking to buy your first farm or a more established operation looking to grow?
Avoiding Operating Interest
Q: Interest, the necessary tool to operate and hold you back at the same time. How do I minimize this exposure?
A: Interest is a necessary tool for many operations to operate, but it doesn't have to be. Being strong with your profits, paying a little bit of income tax, and growing your working capital position to be able to operate on cash and limit your interest exposure are all possible. But it starts with generating strong, consistent profits.
Equipment Lease vs Loan
Q: Have you done anything with lease to own equipment options before?
A: Yes, lease is a great option. It depends on what you are needing, here is what to consider:
-Do you want accelerated depreciation or the multi-year tax benefit the lease offers?
-Leasing may get you a lower interest rate up front, but you can’t pay it off early. You are locked into those payments through the contract.
-Leasing can get you lower payments than the loan route due to a possible high residual (buyout) at the end. This combined with less cash due up front (just first lease payment at closing) helps you preserve more capital.
-Both an asset bought and leased will be shown on your balance sheet. Under liabilities you will show the lease terms.
I have zero preference, you can go either way. What you decide depends on which benefits fit you needs today
Q: Can you change the residual amount do you know?
A: The residual is typically tied to the asset type. Equipment that holds its value well (think new 4wd tractors) have very high residual buyouts. You can ask for a lower residual amount, but I’m not sure you will be able to get it. Usually the goal is to get as high of a residual as possible for improved cash flow.
Once the contract is signed, it is unlikely the residual can be changed. But you can ask!
Need help with your operation's financials?
I have limited spots available for 1-hour consultations helping you:
Understand your farm's financial position.
Prepare for future growth opportunities.
Discuss purchase & finance options on farm transactions you are working through now.
Sign-up here if my services can benefit your operation:
Have a great week!
Grant
