Borrowing capital: should you and when is it appropriate
Disclaimer: I am not a financial adviser. I am not here to give you financial advice. I am simply telling you my story.
Borrowing money is often lauded as taboo among many in the farming and ranching industry. If you can grow your business without borrowed capital then more power to you. It’s all about context within your business. Farming and ranching are capital intensive businesses no matter how you look at it. There are ways to get started with little to no capital, but you will not be able to make a living and feed a family on those wages. Whether you are just starting out or growing a successful business it will require capital. An example of when you need capital is if your ranching business is growing so fast that it’s eating up your cash flow and growth is being inhibited by the lack of capital. I’m here to tell you that there is smart use of debt and bad use of debt.
In the ranching business if it’s not livestock, fencing or water then don’t spend the money. As Greg Judy says “when was the last time you saw a tractor have a baby calf?” Unless your farming large acreage, which requires a tractor and a seed drill of some sort then then by all means buy one. We often get excited about doing a “better job” and making our operations more efficient. I have seen people buy so much equipment that the cattle can’t gain weight fast enough to make payments on all the stuff, much less the upkeep, repairs, labor to operate it, insurance, fuel, and almost forgot depreciation. Keep capital in items that appreciate and there’s only two: livestock and land. To put it simply if it rusts or depreciates, don’t buy it, hire it. The livestock most often can’t support all of these luxuries.
Successful entrepreneurs have the ability to know that when opportunity comes knocking at their door to take it or leave it. Often these opportunities will require a capital investment. There are basically three ways to approach this beast: 1) borrow the money, 2) use savings, 3) partner with a capital investor. I am of the belief that you shouldn’t use savings. You might need this somewhere down the road when things don’t go as planned. A drought or insurance claim are great examples of unexpected expenses. Besides if you can borrow the money or partner with a capital investor then it’s a win for both parties. You grow your business (build equity) and the banker or investor makes money on the interest. Money is cheap currently. You can get a guaranteed loan through several different avenues for around 4%. Banks will lend you money for around 6% depending on your relationship with them and your credit worthiness. Capital investors will be looking for no less than 10% return on their money.
The key thing to remember is to use this borrowed money wisely. Pay due diligence and be certain your financials are strong. This requires good record keeping and financial planning on a monthly basis. If you only look at your financials once a year when tax season is here then you don’t need to be thinking about borrowing money. Good financial planning and record keeping requires discipline, as does borrowing money. Be frugal and spend wisely.
