Do You Really Need That Additional Cash Advance?

June 26, 2019

Do You Really Need That Additional Cash Advance?

Synopsis
4 Minute Read

MNP’s Shannon Lueke cautions producers to understand farm financials and how current conditions affect operations before applying for another cash advance.

Partner and Farm Management Consultant

The weather situation, coupled with market downturns, has left producers feeling stressed. And some producers have already been experiencing a downturn over the past few years despite good conditions — they just won’t realize it until their credit runs out. At that point, it might be too late. But before you apply for additional credit, it’s important to understand your farm financials and how current conditions will really affect your farm operation rather than just measuring your situation with your gut. After all, you’re running a multi-million dollar business. Even if you feel good about your situation, it never hurts to go for a check-up with a third party.

The Advance Payments Program (APP), administered through the CCGA, just began receiving applications for the new advance limits announced by the federal government in May. At $1,000,000, the new advance limits are significant compared to the old program, which had a limit of $400,000. But although these new limits may seem to have been a “long-time coming” to most producers, others will argue that the timing for this is off; this new borrowing granted to farmers may only compound the cash flow issues that are already plaguing the industry.

Before applying for an additional cash advance, ask yourself a few key questions:

  • Do you need that additional advance? Arguably, crop producers should have had their short-term financing requirements in place before seeding began. Therefore, issuing additional short-term credit after seeding is completed may not make sense.
  • Why are you taking an additional advance? Is it to pay down higher interest, current-year input credit lines? This is one of the only reasons to apply for an additional advance. The other reason would be to supplement current-year operating requirements that your lender has not accommodated within your regular facility.
  • Do you know and understand your operating loan covenants? Before you fill out an application for an additional advance, do you know that you are within your bank’s agreement and that the bank will sign off on the advance? It’s important to know your own situation before you approach your lender.

Current-year operating requirements are to fund your current year costs, not the prior year costs. If you are negotiating advances and credit lines to pay down shortfalls from prior years, you have a cash-flow issue that requires assessment and proper action. Some producers aren’t even aware that they are in this situation. You may need to seek out professional advice to help you assess your situation and develop a plan to manage this.

Danny Klinefelter, a former U.S. professor and extension economist, summed it up best: History has shown that extended boom periods tend to be followed by a cleansing period of about three years and then a hangover effect can extend beyond that.

So the question is, can you make it through the cleansing period?

To find out what MNP can do for you, contact your local Farm Management Consultant or Business Advisor.

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