Walk Into Loan Renewal Season Prepared

Gregg Hillyer, Editor Emeritus

Zach Grossman is a numbers guy, admittedly to the point of being anal. He's calculated his Tina, Missouri, farm operation's balance sheet down to the last cent. As a lender for BTC Bank, of Carrollton, Missouri, he knows how important it is for clients to do the same.

"There will likely be difficult conversations, difficult decisions made as this year's balance sheets become clearer following harvest and projections made for 2027," he says, adding that economic headwinds in row-crop country are creating a cautious outlook for both farmers and lenders.

The financial pressure is building. Total farm debt is expected to increase for both real estate and non-real estate debt, climbing to a record $624.7 billion in 2026, according to USDA's Economic Research Service (ERS). That's a 5.2% increase over last year. Farm solvency, which measures the ability of an operation to satisfy its debt obligations on time, is forecast to continue to worsen while working capital is projected to drop by 9.2% over 2025.

COME PREPARED

It's under this scenario that farmers will be sitting down with their creditors to review financials and negotiate funding needs for 2027. Margins may be tight, but lenders emphasize the loan-renewal process and the parameters for constructive conversations haven't changed: Walk in ready.

That means knowing your numbers because lenders will scrutinize your books closer than ever.

"Our lending standards haven't changed. We're still underwriting the same way despite the industry's down cycle," explains David White, commercial relationship manager at INTRUST Bank, based in Wichita, Kansas. "But we've got to dig in and really understand those numbers as we go through that underwriting process and not just take everything at face value, because the landscape changes so much."

Lenders will be diving into the numbers and doing their due diligence, stresses Caleb Hopkins, an ag production loan officer for Landera Ag Finance, located in Halbur, Iowa. "We're spending more time than we might have three or four years ago so that we and our clients have a thorough understanding on what the numbers are telling us."

THE NUMBERS LENDERS WATCH

Several established benchmarks offer a quick read on a farm operation's financial health, typically focusing on liquidity, solvency, profitability, repayment capacity and financial efficiency. Ratios vary with the industry's overall margins, and lenders recognize that every client's operation is different. Under today's financial stress, they are paying particular attention to three metrics:

1. WORKING CAPITAL measures the cash cushion available after current liabilities are subtracted from current assets. It's the first line of defense in a down year. Lender benchmark: a minimum ratio of 1.25 to 1.5.

2. TOTAL DEBT COVERAGE reflects whether your operation generates enough cash-flow to cover all debt payments, including principal and interest. Falling below the threshold signals cash-flow stress. Lender benchmark: 1.25 or better.

3. DEBT-TO-WORTH compares total liabilities to total net worth and indicates how leveraged your operation is. A higher ratio means more risk for both the farmer and the lender. Lender benchmark: below 2.5.

Grossman monitors these metrics when examining his own farm. "I'm a numbers guy both as a farmer and lender. I don't want any fluff in a balance sheet. I want exact numbers with realistic projections, and I stress to my clients they do the same," he says. "When times are good, you can sometimes get a little lax on projections. Not anymore. I want to get everything down to the penny."

YELLOW FLAGS

In this tight-margin environment, lenders lock in on potential trouble spots when analyzing a client's financial statements. Several areas often stand out.

"Farmers are really trying to defend their working capital position, and it's so hard right now," Hopkins points out. Working capital "has never been as valuable as it is today, especially in an environment where interest rates are rising. If you've been eroding your working capital the last two to three years, your cost of operation is becoming higher because your interest expense on your income and expense sheet is increasing."

Grossman sees weaker balance sheets from farmers with recent equipment and technology purchases. "Upgrades -- especially if it is a combine -- are dragging down these operations profitabilitywise as they try to manage capital-debt requirements," he says.

On paper, owned land provides plenty of equity. That's one reason delinquency rates on non-real estate loans for ag production are roughly 1.37%, below the long-run historical average of 1.67%. However, that asset-rich mentality can lull some financially strapped farmers into a false sense of security, Hopkins says. After all, banks are cash-flow lenders, not collateral lenders.

"A farmer may have all the equity in the world," he continues. "The problem is equity doesn't make payments. You've got to cash-flow. And, the number one death of a business is insufficient cash-flow."

PLUG THE LEAKS

Regardless of your financial position, lenders emphasize they are here to support and advise you to help achieve your goals. If you're expecting a negative balance sheet, they stress both parties need to be proactive. The goal is to try to fix the problem today, not ignore it and hope it solves itself. They advise controlling the controllables causing the red ink and stopping the financial leaks.

White says it starts by analyzing a producer's balance sheet and determining how much risk-carrying capacity he has. Say a farmer has $1.5 million of working capital and a $500,000 loss. That means he has three years before his working capital is gone.

"So, then we look at ways to structure or manage around that three-year burn rate, and determine what levers to pull to provide the best avenue to help that producer right the ship and move forward," he adds.

Lenders stress the bottom line to a stronger bottom line is to own your numbers, make sure they are accurate, prepare a game plan to address problem areas and engage in an open and honest conversation.

"Agriculture is a very emotional business," Hopkins says. "I always joke that I should have gotten a minor in psychology, because part of my job is trying to break things down for clients and say, 'Hey, let's separate the emotion from making business decisions.' If you don't and get tied up into it emotionally, it can be very costly."

Sidebar 1:

NONBANK LENDERS GAINING POPULARITY:

Farmers traditionally turn to commercial banks, the Farm Credit System and the USDA Farm Service Agency for operating loans, but the ranks of nonbank lenders that finance specific purchases are growing.

Many of these programs offer reduced interest rates and payment due after the crop is harvested. In addition to financing crop inputs, John Deere Financial also has programs to finance parts and service at a John Deere dealer, explains David O'Malley, manager of aftermarket and agribusiness channel solutions, US/Canada.

"We recognize the challenges farmers are facing and financing is a key tool of support during times like this," he says, adding that John Deere Financial launched a new transparency tool to help farmers find cash-flow and interest savings. The tool shows what credit and financing programs are available through their local seed, crop-protection and fertilizer retailers, as well as input manufacturers in their zip code or location. A calculator provides estimated savings for that specific offer. For example, $100,000 of crop inputs financed at 0% in November will save a farmer more than $10,000 a year of interest versus using their operating line of credit. Find the tool at https://www.inputfinance.com/…

"Looking at alternative finance solutions outside your operating line for crop inputs or for parts and service is really important when cash-flow and margins are tight," O'Malley says.

Sidebar 2:

TIPS FOR A BETTER LENDER CONVERSATION:

Before sitting down with your lender, Tara Durbin, chief lending officer for Farm Credit Mid-America, offers the following advice to have a productive conversation:

-- Don't let a difficult year keep you from having the conversation. For many producers, this has been a challenging year. While it may not be easy to lay your financials on the table, open and honest conversations with your lender are often most valuable during difficult times.

-- Know your numbers before you walk into the meeting. Bring an up-to-date balance sheet, year-end financial statements and current production information. Having a clear understanding of your operation's financial position creates a more productive conversation and helps identify the best path forward.

-- Be prepared to discuss your cash-flow and liquidity. Your lender will want to understand how this year's results affect your working capital as well as upcoming operating expenses. Knowing where you stand today helps you make informed decisions for tomorrow, especially when it comes to financing for the year ahead.

-- Share your plans, not just this year's performance. Whether you're focused on preserving working capital, making strategic investments or simply positioning your operation for next season, discussing your goals gives your lender the opportunity to help evaluate options and develop a plan that fits your operation.

-- Talk through what shaped this year's results. Commodity prices, input costs, weather and other factors have affected operations differently. Helping your lender understand what influenced your bottom line provides important context and supports better planning for the year ahead.

-- Review your debt structure. Year-end is a good time to evaluate whether your financing still aligns with your operation's assets and cash-flow. Small adjustments today may create greater financial flexibility moving forward.

-- Use the meeting as an opportunity. Your lender is more than a source of financing. Ask questions about your operation's financial position, areas of strength and opportunities to improve. Working together before decisions become urgent can help put you in a stronger position for the coming year.

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