2017 Fall Farm Outlook

2017 Logan County Fall Farm Outlook Magazine LINCOLN DAILY NEWS Oct. 25, 2017 Page 41 ■ Leverage ratio considers all the assets of your operation – the ratio between what is owned versus what is purchased on credit - and determines what level of your total owned operation is leveraged against your debt. A lender’s primary concern will be the security of their investment, and secondarily, the success of your operation. Security and success are tightly tied together with the final three elements: loan to value, shock test and burn factor. ■ Wikipedia defines your loan-to-value (LTV) ratio as the ratio of a loan to the value of an asset purchased. The term is commonly used to represent the ratio of the first mortgage line as a percentage of the total appraised value of real property. For instance, if someone borrows $130,000 to purchase a house worth $150,000, the LTV ratio is $130,000 to $150,000 or $130,000/$150,000, or 87%. The remaining 13% represent the lender’s “haircut” (a haircut is the difference between the market value of an asset used as loan collateral and the amount of the loan. The amount of the haircut reflects the lender’s perceived risk of loss), adding up to 100% and being covered from the borrower’s equity. The higher the LTV ratio, the riskier the loan is for a lender. ■ Financial shock tests are designed to visualize your cash flow through your production season. They are designed to determine if you will have the resources necessary to meet the needs of your operation (and your family) and the cost of your indebtedness. Shock tests may have an impact on your business plan, your marketing plan, and your plans to buy new equipment, land, or buildings. ■ An element related to shock tests is “burn factor,” the rate at which a company uses up its supply of cash over time. Lenders will be especially cautious around producers with high cash burn rates. These investments can turn to ashes. The fourth area of a lender’s focus will be determining your level of financial management ability. A producer who has a low level of managing finances and bookkeeping and does not hire the necessary help will not be able to anticipate trends or strategize clearly. Taking classes on farm financial management and hiring expert in financial help will spell out whether your Continued ►►