How to buy time to catch up on farm debt

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Last week, we discussed some of the ways to manage farm income and cash flow. This week, we provide some ways to manage your liabilities. Most of these options will not reduce your debt, but they may buy you more time to catch up.

1Extend loan terms
A common way to reduce cash flow pressure is to negotiate longer repayment terms. This will often reduce cash-flow pressure, but remember that the debt must still be paid and that this strategy will not reduce cost, nor increase income. Extending the repayment terms is a way to buy yourself more time.

2
Reamortize carryover
Some farmers will be unable to repay their operating loan in years of financial stress and consequently will incur carryover debt. One way to manage this carryover is to convert it into a longer-term loan — of maybe five years — and set up a payment schedule to systematically reduce it over time.

3Pay interest only
When a loan is well secured and cash-flow shortage is assumed to be temporary, the lender may accept an interest-only payment as an alternative to the full principal and interest payment required by the amortization schedule.

4Increase collateral
This strategy does little to relieve the root causes of financial stress, but it does give the lender a stronger financial position in case of default down the road.

5Acquire guarantees or contracts
Like increasing collateral, this strategy increases the comfort level of the lender and, consequently, should increase his willingness to extend repayment terms or reamortize collateral.

6Reduce debt
Pay off some of the debt and reduce the debt servicing requirements. The funds might come from non-farm earnings, other family members in the form of a gift or personal loan with attractive terms, or the sale of farm business assets.

7Refinance
If interest rates have declined, it might be possible to refinance some loans and reduce interest expenses. You need to compare the cost of refinancing with the savings in interest.

Sources: Purdue Extension.

Next week: Farm and Dairy will look at how to manage assets.

(Farm and Dairy is featuring a series of “101” columns throughout the year to help young and beginning farmers master farm living. From finances to management to machinery repair and animal care, farmers do it all.)

More Farming 101 columns:

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