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Mitigating the Risks of Shareholder’s Loans in Your Farm Business

In any farming operation, whether incorporated or sole proprietorship, capital has to be put into the operations.

One sitution with an incorporated farm is when capital is required and a shareholder contributes assets or cash, sometimes the consideration that comes back to the shareholder is a shareholder loan (i.e. the farming operation owes the shareholder money). Therefore, it is prudent for the shareholder to become a secured shareholder, meaning they secure the loan the farming operation owes. This is important so that in the event the farm business needs to pay off creditors, the debt owed to the shareholder is secured, and thus will be paid off before any unsecured debts.

It is essential to remember that the key to mitigating any risk is to understand that you’re running a business. Even though it is your farm operation, it is still a business, and just as a prudent business person would want to secure a loan given to a corporation, you should also make sure you’re loan is secured when loaning to your incorporated farm.

Watch Tracy Hanson explain how to mitigate the risks of shareholder loans to your farming operation.

This workshop was funded in part by the Agriculture & Food Council of Alberta


Mitigating the Risks of Shareholder Loans in your Farm Business

 

The 6 Financial Options on Your Farm

What are the financial options for your farm?

Reg Shandro boils it down to 6 distinct areas where your farm businesscan get revenue from.

1. Surface right revenues;

  1. Inheritance or lottery;
  2. New borrowing or restructuring debt;
  3. Sale of Assets;
  4. Off Farm income;
  5. On farm income;Take a look at which ones are within your control, I bet it’s fewer than you’d think.

    If you’d like to follow along in figuring our the 6 financial options for your farm, you’ll need:

    1. A piece of paper divided up like in the video;

    2. A red pen and green pen;

    Watch the video to figure out how to do the rest!

This workshop was funded in part by the Agriculture & Food Council of Alberta

 

 

Is Your Farm Operation Over-Capitalized?

Another component of financial risk is over-capitalization.

You have to understand what part of your operation is capitalized and what part is focused on producing revenue assets. This ratio is called the turn-over ratio – for every 1 million dollars of assets – what percentage is turning over into gross-revenue every year. A great target is $400,000 or 40%. This money is what you use to pay off your debt, pay yourself, and feed your family.

Watch Reg Shandro explain how to find out whether your farm operation is over-capitalized.

If you’d like help with your financial analysis, download the Agricultural Business Analyzer.
This workshop was funded in part by the Agriculture & Food Council of Alberta


Is your Farm Operation Over-Capitalized?

 

Introduction to the Financial Risk Pillar of Your Farm Operation

As a farmer, you need to understand your farm finances in your operation so that you can mitigate risk.

There are three main things that you should be aware of:

  1. Profitability:The first thing to understand is whether your farm business is profitable. You need to be able to make an operational profit, or you cannot farm. It’s as simple as that.2. Assets: Number two is that you need to protect your assets.

    3. Role as a farmer: Number three is that you need to clarify your job as a farmer. We sometimes confuse what we like to do, with our role as a farmer. However, “like” doesn’t feed your family.

    There’s a rural myth that by working hard, you’re making money. However, it’s essential to take a step back from the hard work, and really try and understand your numbers. Think about it this way – would you ever accept the terms of conditions of employment, in which you work all year and then pay your employer money to have that job?

    WatchReg Shandro introduces the financial risk pillar of the ‘5 Pillars of Risk Management’ and tell you what to look out for.

    This workshop was funded in part by the Agriculture & Food Council of Alberta

 

How to Understand Your Farm Operation’s Working Capital

 

Working capital = your current assets MINUS your current liabilities (what you need to pay off in the next year)

It’s a representative of your ability to weather your short term commitments. Different farms (with different focuses, for eg. wheat vs. dairy) will have different working capital expectations.

By rule of thumb, you should have 25% of next-years expenses sitting in working capital. So, if you have 1.25 million dollars of assets sitting there in cash or inventory and you have 1 million dollars of expenses next year, then you will have a $250,000 buffer to allow for some breathing room for next-years expenses. If your farm has no breathing room, you’ll have to have a plan for what will get you through the down curve, or unexpected events in your farming production.

Watch Reg Shandro shares a few simple tips to take a look at how your capital is working for you.

This workshop was funded in part by the Agriculture & Food Council of Alberta

 

How a Banker Will Look at Your Farm Business

Reg Shandro explains how the banker will look at your farming business and how you can strengthen your relationship with your lender.

Reg Shandro explains how to strengthen your relationship with your banker.

A huge component of financial risk in agriculture, is to maintain and strengthen your relationship with your local lender. This is very important, because if the lender has confidence in you, the likelihood that they’ll be able to assist you with your lending requests is going to be a lot higher.

The lender will look at your farming business in three different ways:

1. What is your industry risk? Who you are and how do you know your agrilcultural operation?

2. What is your business risk?

3. What is your financial risk?
This workshop was funded in part by the Agriculture & Food Council of Alberta

 

 

Farming Isn’t Always About Owning the Land

Farming isn’t a question of owning farm land. Instead, it’s a question of being in the business of farming. There are many available opportunities for getting into the business of farming but you have to make sure you’re heart is in the business. If you’re heart is in farming, the rest will work itself out.

Watch Fred Mertzfrom Farming for Freedom, discusses how you don’t have to always own the land you work on to be a farmer.

This workshop was funded in part by the Agriculture & Food Council of Alberta

 

 

Using Life Insurance to Create Fairness in Farm Succession

You can use life insurance to deal with farm succession. One of the main things that insurance agents see is a farmer who is asset rich but cash poor. This scenario can create problems for farm succession, however, life insurance can step in and help create fairness in farm families and cash for the parties involved.

Here’s a great example to show how life insurance can help with farm succession. A farmer has one son and two daughters. In this particular case, the son wants to farm but the daughters have no interest in farming. How should the farmer plan succession of the farm so that the outcome is fair to everyone? One answer is through life insurance. The son can take over the farm and receive the benefits from the takeover, and the daughters can receive the benefit of the life insurance policy. This makes things very simple, and ensures that everyone is treated fairly in the succession of the farm business.

Watch Derrick Peterson explain this and a lot more in this highly informative video!

This workshop was funded in part by the Agriculture & Food Council of Alberta

For further resources on life insurance and farm insurance please refer to the links below:

Life Insurance: An Estate Planning Tool

Guide to Farm Insurance

 

3 Types of Insurance Policies that can Benefit Your Farm Business

Did you know that there are different types of insurance policies that could benefit your farm business? Similar to there being a variety of different ways you can enjoy the benefit of a home, there are a variety of different ways you can enjoy the benefit of an insurance policy.

Using a house as an example, here’s 3 different types of insurance policies:

1. Rent: You can rent a home and pay money to a landlord. This arrangement works great when you don’t have the money to buy, but remember the landlord can always decide to raise the rent! Similarly, there’s insurance products like this where you rent the policy.

2. Rent to own: In some situations, it’s even possible to put the rent you pay to the landlord towards buying the home you’re renting. Again, there’s insurance poliies that work like this, where in the end, you own the policy.

3. Buy: you can outright buy a home. With an insurance policy, if you buy, it’s yours forever.

To learn more, watch Derrick Peterson explains different types of insurance policies for your farm business.

This workshop was funded in part by the Agriculture & Food Council of Alberta