Debt smarts: Strategize for financial stability and growth

Debt can make some people feel uncomfortable – but if taken on wisely, debt can be in service to your long-term strategic business plan.

The first step in ensuring you’re not taking on debt unnecessarily, however, is having a plan in the first place.

Match debt to cash flow

Write your plan down and get granular with what your intentions are.

“As a lender, one of the things helpful to me is if the customer has a plan,” says Shannon Bussiere, an FCC senior credit manager based in Saskatoon, Sask. “Write your plan down and get granular with what your intentions are.”

In Bussiere’s experience, farm operators have become more inclined to consult with financial and legal professionals on how they plan to grow their businesses. This, she says, highlights a more widespread recognition that planning is important to maintaining cash flow in the shadow of ever-growing values of land, equipment and other assets. Making use of advisors is particularly helpful where there’s more than one person or party in a position of authority.

Still, many farm businesses are unprepared for unexpected capital expenditures – such as when a neighbour announces they’re getting out of the business and asks you to buy their farm. Taking on debt this way can leave the purchaser vulnerable because that debt was not planned for and may not fit well with their cash flow situation.

“Understand what’s coming in the future,” Bussiere says. “That way you can layer debt to match cash flows. If there’s a parcel a farmer wants to purchase in the future, how do we structure debt today to ensure we’re in a position to purchase that parcel when we want?”

Personal versus business

Bussiere says that mixing personal debt with business debt is not uncommon in agriculture, given how closely farm business owners align their personal and professional identities. However, this can be a problem since personal debts are not productive for the business.

“Productive debt would be what you take on to acquire revenue-generating assets,” Bussiere says. On the other hand, non-productive debt is like buying a boat, recreational vehicle or something else that isn’t going to generate any revenue for your farm.

Andrea De Groot, an FCC business advisor based in Guelph, Ont., agrees. She describes productive debt as something that serves longer-term goals through increased efficiency, productivity or anything else that helps drive cash flow.

Sometimes, though, identifying what is or is not personal can be difficult, especially if someone historically re-invested everything back into the farm. Addressing such legacies, and the ingrained behaviours they may lead to, means identifying who owns what assets and who has what debts.

De Groot uses five categories to track cost of living and personal spending:

• basics like food and everyday expenses

• housing expenses, including property taxes and utilities

• vehicle-related costs

• health-related costs

• luxuries like discretionary vehicles, trips, etc.

Financial advisors and cost-of-living calculators can be helpful in this regard.

The importance of communication

Good communication between everyone involved in the farm is also important. “If there’s a de-facto leader, for instance, there’s not always an opportunity to have questions or understand fully where everyone is coming from,” De Groot says. “For some people, some aspects of debt are OK, like if it’s tied to land or equipment. Debt for equipment, as opposed to using the home farm as collateral for a loan or debt, can be tough for some people. If you don’t communicate your emotions about it, that stress will boil over.”

For Bussiere, the need for good communication also applies to conversations about revenue.

“It’s not often we have an in-depth, granular conversation on what’s the break-even point and what’s revenue. In a corporate business, that’s a much more common conversation,” she says.

“There are a ton of free courses available to help. Take advantage of those opportunities because a little education can save a lot of money over the long term,” Bussiere says.

One free online course series to consider is Manage Your Farm Finances. Created by FCC and experienced advisors from BDO Canada, this interactive course offers practical how-to advice from chartered professional accountants and strategic business advisors who specialize in agriculture.

Know your credit score

Another critical – and, according to Bussiere, often missing – piece of knowledge is knowing your credit score. Indeed, she says it surprises her how many people don’t understand their credit score, how to raise it and the impact of a poor score.

“It really doesn’t matter where you go to borrow money. You will pay more because your credit risk is deemed to be higher,” Bussiere says. Simple methods to improve credit scores include designating a dedicated person to make bill payments on time and setting up automatic payments.

From an AgriSuccess article by Matt McIntosh.