When a farm credit lender is evaluating a farmer, what data points matter the most?
Farm credit lenders evaluate farmers holistically. Cash flow, farm assets, and credit history are often data points in the larger picture (some lenders call this picture the “5 C’s of Farm Credit“). With so many factors in play, what information is the most important?
Welcome back to our series on how to get better farm credit (see part I and part 2)! In this post, we’re going to explore the metric of working capital. Working capital is another measurement of the farm’s liquidity that farm credit lenders check. You can measure your own working capital by subtracting your current liabilities (operating credits/accounts payable etc.) from your current assets (crops/livestock, supplies, accounts receivable, cash on hand etc.).
What’s a “good” measure of working capital? That depends on your expenses as an operation. You want your working capital to be able to adequately cover your expenses. These expenses can include costs of living, debt and tax payments. The University of MN Extension describes a helpful framework to think about adequate working capital. Farmers should divide their working capital by their gross (pre-tax) farm income. If the number is less than 10%, this is considered low (because the farmers will have to depend on borrowed money to operate). 10%-20% is considered fair, while the best working capital to gross income ratio is 30% or higher.
How can farmers improve their financial health through the lens of working capital? The best way to do this is through increasing farm income. Stay tuned for more on this topic coming soon.