When you run a farm or ranch, there’s no end to the bills. From planned purchases or annual expenses; like feed, seed, and fertilizer to unplanned expenses like machinery repairs and vet bills, it often seems like you must spend a lot of money to see any returns. With so many costs, how can you establish consistency with your finances and maintain control of your cash flow (liquidity)?
A solution may be to have a revolving line of credit (RLOC).
What is a Revolving Line of Credit?
An RLOC, sometimes called a “revolver,” is an open-ended operating loan that’s preapproved for a specified sum or spending limit. In a way, it’s like a credit card but with the added benefit of a lower interest rate. You can use this revolving line of credit to finance purchases until you sell your crops or livestock.
How Does a Revolving Line of Credit Work?
Unlike other types of loans, the available balance of your RLOC will increase when you use funds and decrease when you repay them. Instead of having a set payment, what you owe will depend on what you’ve spent, and interest can be paid monthly, quarterly, semi-annually, or annually depending on your terms. Funds can also be advanced, paid back and re-advanced up to the loan's maturity date.
The best part about a revolving line of credit is that you only pay interest on the funds you use, rather than the total commitment like you would on a standard loan.
When is a Revolving Line of Credit Useful?
In an agricultural operation, where the cash flow and liquidity of finances often ebb and flow, a revolving line of credit can provide day-to-day liquidity and fund ongoing expenses when the production cycle and timing of sales create cash flow challenges. A “revolver” may be especially useful when you need to finance purchases for receivables, products that have been delivered but not paid for yet.
How Long are RLOC Terms?
The term or loan period for a revolving line of credit is usually one year. However, for commercial operations and those with long production cycles like timber operations, the loan period can be up to 3 years.
How is a Revolving Line of Credit Secured?
RLOCs can be secured by various assets, including:
- Real estate
- Commodities – Crops/Cattle/Catfish
- Inventories / Account Receivables
Just like any other loan or credit card, an RLOCs credit limit is decided based on the borrower’s creditworthiness.
You can learn more about RLOCs and find out how a revolving line of credit can be a useful financing tool for your agricultural operation by contacting Alabama Ag Credit. Our relationship managers would be glad to assist you!