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How to Structure Debt to Weather Tough Times


This article was originally published in the Western Producer and has been reproduced with permission

Western Canadian farmers have enjoyed some great years recently and farm income statistics confirm it.
But this can lead to complacency in financing and debt structure, which can cause problems when markets or weather don’t co-operate.

Get your financial house in order

Refinancing, or replacing existing debt with new loans under different terms, will allow you to select the best debt structure for your  needs and to satisfy existing and future lenders. With banks aggressively seeking new clients, it’s a great time to take a look at your debt structure.

The benefits of creating a strong debt structure for yourself and your farm are three-fold:

  • Risk management
  • Save money
  • Flexibility

Risk Management - what to consider

Proper debt structure allows continued, flexible debt service in the event of a crisis. During a crisis or economic downturn lenders have less of an appetite for risk. They will require more documentation, higher down payments and will be paying greater attention to repayment capacity and your risk management plan.

As a result, you need to identify your key risk factors, and the impact they would have on your bottom line, then develop a customized risk strategy.

Right vs. Obligation

When you set up your debt repayment plans with your banker, are you in a position of having a right to pay, or are you obligated to pay? When you borrow money with an aggressive repayment schedule, you are obligated to pay it back based on that condensed repayment schedule.

But,  depending on the asset you purchase, you can extend the amortization or repayment over a longer period. Most of these loans have a prepayment clause that allows you to pay a percentage of the original loan balance every year. This flexibility is very important in an industry like agriculture where income can be volatile.

When considering debt repayment, you should not obligate yourself to pay more than 10 percent of your debt annually. Your debt service ratio (the ratio of cash available to service principle, interest and lease payments) should be greater than 1.5:1.

The last thing to do is to test it. Pencil in a potential issue for your business. How will you manage if farm revenues decline by 10, 20 or 30 percent?

Save Money

There are many more options available today when looking at debt structure. As well as the traditional fixed and floating rates, there is increased flexibility in moving between rate types, Banker Acceptance (similar to a post-dated cheque but held by the bank), longer amortization periods, longer terms and interest only repayment options.

All of these tools provide anyone looking to restructure their debt and minimize risk sufficient options to meet their specific business needs.


The final benefit in refinancing your debt is the flexibility some of these options provide. The right debt structure will include a number of tools that will allow you to “set it and forget it.”

Matching the term of the loan with the life of the asset is an important business principle. Don’t buy longer-term assets (land or equipment) with cash or operating lines as it can leave you short in a crisis. Cash should be available for day-to-day business expenses and seasonal operating bulges.

The re-advanceable line of credit and/or equipment operating line act like an operating loan but are designated for the purchase of longer-term assets such as land or equipment.  They are similar to a home equity line of credit as it can be paid down and funds can be re-borrowed when needed.

Protect yourself and your business

Agriculture is a sophisticated industry and a sophisticated, strategic approach is required to manage a farm business today. Working with a farm management consultant can provide a review of all aspects of your operation and look to the future to ensure you are ready for whatever is around the next corner.

Aaron Honess is a Farm Management Consultant with MNP’s Lethbridge office. He can be reached at 403.380.1618 or [email protected]