Working With Creditors When Times Are Tight

Dianne Shoemaker

A dairy farm may operate with no debt and a few do. The majority of dairy farms, however, use some form of credit to finance their operations. Credit use ranges from long-term mortgages to finance the purchase of land, to loans for buildings, cattle, machinery, or equipment, to operating lines of credit , and to interest charges on open account balances. As a result of poor milk prices and poor crops in 2002, some farms have found themselves owing more money than they have been able to cash flow.

Symptoms include balances on open accounts that are higher than normal, existing lines of credit that are at maximum, loan payments made late or missed, family living that may have been dramatically reduced and/or no cash in the checking account. This situation is uncomfortable for the farm family and to those that they owe money. How can both parties work through these situations? Three important actions for both parties are to talk, evaluate, talk, plan, and talk.

Talk it over. The best time to start talking to creditors is when you first see a problem developing. Many customers of commercial lenders understand that paying their notes first is a priority because they call the soonest if a payment is late. However, supplier's margins are tight, just as dairy producer's margins are. Suppliers are much less likely to carry open accounts for as long or for as much money as they did in the past. Many are hiring specialists to help keep their open accounts to smaller, more manageable levels.

Call or stop in and visit with the business that you will not be able to pay in full as scheduled. Explain the situation and discuss payment options. Can you stay current from now on and pay off the existing balance over the next few months? Can you negotiate an interest rate less than the 18 to 30% frequently charged on open accounts? Farm suppliers also have businesses to run and bills to pay. They will be much more willing to discuss options before a big balance develops, which hurts their ability to do business as well as your farm's.

Evaluate. When accounts have unpaid balances, you forgo opportunities to get cash or early payment discounts,which costs your farm additional money. At some point, you will need to discuss an operating line of credit with your lender. If your current line is at maximum, you may be able to refinance some or all of the debt over a longer term. Extreme caution must be used before this strategy is followed. You must take a serious look at why the credit was allowed to reach the maximum limit. Was the line of credit truly used for operating expenses (such as feed, seed, fertilizer, supplies, etc.,) or was it used to buy cattle, equipment, machinery, or other items that should have been financed over a longer period of time to begin with?

If longer-term assets were purchased with the line of credit, the lender may fairly easily be able to refinance those over a longer term. If not, refinancing may be more difficult and costly. It is vital for the long-term survival of your dairy enterprise that current debt (whether it was used for operating or longer term expenses) not be rolled over into longer-term debt without determining why it was necessary and carefully planning, monitoring profitability, and cash flow in the future. A successful farm cannot afford to do this more than once or twice during its business lifetime.

Plan. Planning is important from two perspectives. First, thoughtfully and realistically develop a payment plan to pay off balances on open accounts, while keeping current with new purchases. No one is saying that this process will be easy. Planned purchases or projects may have to be delayed. The "extra" labor that just quit may temporarily not be replaced. If a workable plan cannot be developed, then hard questions have to be asked about the long-term viability of the farm as it currently operates.

What were the factors that brought the farm to this situation? Beyond the major factors of price and drought, each farm's situation will be slightly different. Then ask the hard questions such as "How can we be sure this will not happen again?" "What were some of the signals that we should have seen earlier?" "What were some of the actions we could have taken earlier to prevent the situation from getting as far as it did?"

Finally, keep talking. There may still be bumps in the best-made plans. Keeping family and creditors informed and talking keeps the lines of communication and understanding open and reduces the stress during tight times for all involved.