Your children may get out of school this month. But, those of us in the dairy industry know that education is a year-round process and we need to be ready to do our "homework" on a constant basis. Many dairy producers in the West are currently taking a "free-stall class," requiring much homework before they visit a bank for financing.
In California, adding free-stalls has become the rage. Nearly every new operation is including free-stalls as part of its plan, and every remodeling project seems to be including them as well.
If you are considering free-stalls, you need to ask yourself the following questions:
- Do I have enough space?
- Do I still get the flow of cattle I need?
- Is my waste disposal system able to handle it?
- Can I get the necessary permits?
- How might it increase my bottom-line profitability?
Whether adding free-stalls or considering another type of expansion or remodeling project, these type of questions must be answered first. Your banker can help you understand your financing options, but you need to determine if the change in facilities is right for you.
Once you have made the decision to build free-stalls, the big question becomes how to finance them. A variety of options exist. The easiest way to finance is a new construction loan that includes free-stalls in the original plan.
The difficult decisions come when you change or add to existing operations. The following are options your lender may suggest for getting the necessary funds.
- Real estate loan. This option provides you with the most flexibility in repayment. However, you must consider the cost associated with refinancing your current real estate loan, including appraisals, fees and the cost of a new title policy. If you have an existing loan, you may be subject to pre-payment penalties or changes in interest rates.
In addition, most real estate companies do not offer construction loans. That means you must find interim financing for the construction phase of the project. Perhaps, a second trust deed could be put in place. I suggest reading the "fine print" on any existing notes and agreements to see what options you have. Check with the lender holding the first trust deed to see what he might suggest. Historically, it has always been less expensive if the first trust deed holder is willing to work with you.
- Intermediate term loan. This option would require a lender who is willing to take a second position - providing funds while not disturbing the first trust deed. This is more difficult and usually means higher advance rates, interest rates and fees. I suggest that you check the cash flow you would need to leave the first trust deed alone and combine the repayment of the second mortgage with the first.
- Short-term financing. This is a popular way to finance free-stalls.
The most common way would be to add the proposed new debt to an existing herd loan. As positive as the dairy cash flows have been this past year, hopefully large pay-downs on cow debt have occurred. This increases your total equity in livestock and increases your borrowing capacity. Your homework question here is the same: Can the cash flow cover the debt service repayment of this loan if you add in the construction cost of free-stalls?
- No financing needed. Certainly, this is how we would like to handle the project. In some instances, it even may be possible. Maybe you have cash, stocks, bonds or some other source of liquid reserves. However, before you use those assets, you must determine if the current investment or the conversion of assets to build free-stalls will generate a better return.
All of these methods for financing the free-stalls hinge on cash flow. Usually the issue is not one of sufficient collateral, but whether or not the ability to repay the loan exists.
Anthony DeRose is a senior vice president of Wells Fargo Bank in Tulare, Calif.