What To Know When You’re At The Table With An Alternative Ag Lender
I recently wrote about the bigger role that alternative lenders are playing in agriculture. They can often provide capital for expansion and growth opportunities that traditional banks can’t or won’t.
If you’re ready to meet with an alternative lender, here are some points to keep in mind:
Bring your team to the table. Financial and business arrangements can get complicated quickly, says my colleague Scott Miller, a principal and director of national tax solutions with Pinion. When you meet with an alternative lender, surround yourself with your business attorney, tax advisor, accountant and anyone else who can look out for your interests. They’ll help you understand the fine print, think through potential ramifications and offer advice to structure the best deal for you.
Negotiate. Every deal is different, so negotiate with the financer. This will be a mid- to long-term partnership, so you want the best rates, terms and conditions you can get. For example, if a 15-year deal creates cash-flow problems for your business, you might negotiate a 25-year deal instead.
Consider the entity structure. There are two general ways your deal will likely be structured. It may work more like traditional financing, with an interest expense. Or, it can be formed as a partnership, where you’ll share profits and losses from the business with the lender. Further, Miller notes, “you now have a partner who may want to be part of the decision-making process.” He also points out that you’ll have to negotiate how distributions will be made. Will the lender receive distributions first, up to the amount put in plus a return, before you do?
Take into account tax issues, liability protection and security. If your deal works more like traditional financing, you’ll have interest expenses, which could bring you into interest-expense limitations. “Make sure you run the numbers, be aware of any limitations and understand the farming election if necessary,” Miller says. You may also form separate entities for your land, operations and equipment so you have liability protection.
Touch base with your local Farm Service Agency office. It’s important to ensure there are no issues, such as entity structure and collateral, that could impact your eligibility for FSA payments.
Keep accounting methods in mind. If you enter a partnership arrangement, you want to make sure you avoid problems with your cash method of accounting. Since most farmers use the cash method, those rules can get tricky when you bring in other owners, Miller says.
As you can see, financing deals can be complicated, especially when you’re entering the relatively new territory of alternative lending. Make sure you have your eyes wide open and a team of experts at your side every step of the way.
Read More from Kala:
Out-of-the Box Lending Options for Farmers
