Farmers need to manage debt wisely if borrowing money for farm-business opportunities.
As summer approaches, farmers are among the consumers and businesses feeling the effects of price hikes. Because people in general are spending less—even on products offered by farmers—farmers need to think strategically about their financial situations.
When borrowing money, farmers need to think about how much they should borrow and how to use it to better their businesses, says Brent Gloy, an agricultural economist at Purdue University. When pursuing business opportunities, incurring debt at the start of a project can be an important tool for business growth.
“Opportunities may come up, and you may need to borrow money to go after them,” Gloy says. “Borrowing in moderation and using the funds for the right things are very important.”
Farmers may need to borrow money to expand farm operations, save on costs or improve the farm’s efficiency. If it’s necessary to borrow money for things like this, they should carefully consider if the debt is necessary and if it will threaten the farm’s financial security, Gloy says.
“Think about what you need, what the return is and what you’re risking, and think about that carefully,” he says. “On the other hand, you don’t want to walk away from things that fit with what you do and that you’re capable of handling. Just make sure they are the right opportunities.”
Selecting profitable farm-business opportunities can be hard work, but if done right, incurring a little debt up front can mean wealth in the long run.
“Rarely will wealth be handed to you. You will have to make the investment and then do the hard work of managing the business to capture the value,” Gloy says. ”Building wealth requires sacrifice. In order to build wealth, you must delay or reduce consumption below income generation.”
He says farmers hoping to make a profit should engage in smart business practices and only worry about the business factors they can control.
“Too many times, we get wrapped up in thinking of the big picture, and we don’t think about the fundamentals of our business,” Gloy says. “Start by understanding where you are and what your options are to change where you are.”
He also says it’s important for farmers to know the cost versus return of every business decision they make and what changes in business practices are necessary to increase revenue.
He recommends farmers use these business-management tips to get started on the road to profitability:
- Understand the economics of your farm business. Always work to improve your business advantages.
- Don’t be paralyzed by analysis and complication. Make well-thought-out decisions, not those based on blind faith.
- If you find yourself in financial trouble, address it early and honestly.
- Clearly understand risk and return trade-offs. Don’t gamble your financial security for things you don’t need.
- Invest in yourself. Your knowledge and talent is the most valuable set of assets that you own and can reap benefits for years to come.
- Invest in those around you. Talented people can help you solve farm problems. When you invest in someone else, it usually pays dividends down the road.