Understanding types of debt
“I’m making way too much money?” asked no farmer ever. In this economy, we’re all dealing with increasing costs.
With expenses increasing at every level, understanding and managing interest cost is critical to our future success in agriculture. It’s important to recognize debt as a tool. However, considering the higher cost of other people’s money, it should be used as judiciously as possible. The double whammy we’re facing is inflation and increasing rates.
Debt can be viewed as leverage to pay for production inputs, purchasing hard assets like equipment and durable assets like real estate. It’s tempting and sometimes necessary to opt for a longer payback or loan term to offset the increase in loan payments. Be mindful that you want your loan payoff to be sooner than the life of that asset.
Operating credit for seed, feed, fertilizer, supplies and other short-term needs should be paid within a year. Tractors, implements, vehicles and other farm equipment should be financed for a period not to exceed 84 months or seven years. Farm and other real estate are considered durable assets and warrant a longer-term financing period. Here again, the lifespan of the income producing assets on the land (or facilities) may limit the loan term to their remaining useful life or RUL.
One effective way to manage and reduce interest cost is to pre-pay on loan principal whenever possible. Absent a pre-pay penalty, most lenders will allow you to add additional funds to your regular payment and/or make a special principal payment when additional funds become available. Consider the sale of one more calf or a tax refund as money that can be applied to your loan. Apply the extra funds to the credit or loan with the highest interest rate. Keep a record of principal paydown. The net effect is a reduction in the effective rate you’re paying on that specific debt.
Under current conditions, it really pays to shop for credit. Your good credit can still be rewarded as evidenced through your credit bureau ratings and your past business relationships. Ask your bank, credit union or lender about ways to qualify for a lower rate.
You can offset some rate shock by taking advantage of higher rate options on your money. Sources like bankrate.com, Money magazine and other published financial sources can list the best money market rates for your savings.
The cost of debt, like any other discipline requires on-going management. There will be a time again in the future where rates become more competitive. By maintaining your good credit, you’ll be able to negotiate better rates when that time comes. Consider involving a trusted associate in large purchase decisions involving debt. Outside perspectives matter.
Good Service is Good Business
On a different note, I’d like to touch on the benefits of providing excellent customer service. From the perspective of the end-user or buyer, and from the service provider, quality customer service seems to be a dying art form. It doesn’t have to be that way.
It’s my view that truly exemplary customer service pays dividends for everyone involved. Alternatively, poor service is clearly a detriment to everyone. We’ve all experienced both sides of this issue. It truly is a win-win when an elevated level of service is provided. There are multiple benefits:
• Positive word of mouth prevails
• We enjoy sharing quality experiences
• The provider feels good about doing a job well done
• This generates repeat business
• Tips and gratuity are higher
• Great service providers get promoted
Life is too short to endure poor levels of service. We may do it once, but given other options, that person or business will not see us again. Afterall, we can vote with our pocketbook.
