Managing a RLOC
January 12, 2022

Lines of credit are important tools that farms use to help manage cash flow needs. A line of credit will be there when you need it to help your operation, whether you are looking to obtain discounts on bulk purchases, make timely payments or cover an unforeseen expense.

Here is some helpful information for managing a revolving line of credit (RLOC). Lenders will use collateral on the farm to secure your line and help determine the amount for which your operation would qualify. When calculating the RLOC loan amount, lenders take the monthly payment into consideration if the line was to be fully advanced. This amount could vary from year to year as inventories fluctuate on the farm and cash flow is calculated based on projected net income.

For most dairy farms, lenders will set a payment as if the line was fully advanced, especially if used for growing crops, as the crops are typically consumed by the dairy herd as feed and not sold after harvest to repay the RLOC. Think of your line like a pay as you go plan, that helps ensure funds will be available for next year.

Properly managing your RLOC is important to your success and gives you the security of knowing that the line can be renewed when it matures. A mismanaged RLOC will make it difficult for a lender to renew the loan at maturity and puts you at risk of losing the flexibility provided by the line.

As an example, let’s say you purchase a piece of equipment using funds from your line without informing your lender about the “use of funds” for that advance, and let’s also assume that a few months later your farm’s cash flow tightens, and the operation is not able to make payroll.  If the equipment purchase has left you with insufficient funds to draw on to meet payroll, this will create an undue hardship for the farm and will likely lead to a difficult discussion with your lender. The equipment purchase should have been put on a capital loan and amortized over the life of the equipment. In many cases, your lender may not have the time to raise the RLOC with such short notice. If you talk with your lender ahead of a capital purchase, most likely your lender will work with you to put a new loan in place for this expenditure.

Communicating with your lender ahead of time, especially if you intend to make a capital purchase, will ensure that you and your lender are on the same page. Your lender will then help you determine if it would be okay to advance these funds off your line of credit and then determine a certain dollar amount to move to a capital loan in order to replenish your line of credit. The approval would be determined on the availability to cash flow the purchase over the term of the loan and not exceed the expected useful life of the equipment. In most cases, your lender would be better able to explain the loan request to a committee.

In short, lenders do not like to be surprised with a last-minute requests as they like to have time to prepare a credit request for submission. If you use your RLOC for expenses for the current year and make your agreed upon payments, your relationship with your lender has a better chance of remaining in good standing.   

Expense items that your line of credit can be useful for during the current year:

  1. Taking advantage of discounts for early order seed programs offered by your vendors
  2. Receiving a discount through your farm supplies vendor for buying in bulk
  3. Paying a neighbor or vendor for planting and/or harvesting your crops
  4. Helping with payroll during times of tight margins
  5. Making a large commodity purchase to obtain discounts
  6. Keeping your feed vendor current during a tight cash flow month
  7. Paying property taxes or income tax liability
  8. Purchasing fuel in bulk while prices are low

There are many ways to use a revolving line of credit for which the payback is typically over a 12-month period. One of the benefits of having and properly maintaining your RLOC is that once a payment is received, the operation will have funds available to draw again (total payment minus interest). This gives the operation the availability to have access to funds throughout the year.

Some lenders may offer a non-revolving operating line of credit for certain purchases made during the same time each year. These lines are easier for the farm to manage although you do not have the flexibility to readvance funds throughout the year. The payment is set up over a 12-month period to ensure that next year the operation can apply again for the yearly purchase.

In closing, communication with your lender is key to matching up the needs of your operation and the type of loan(s) required to help your operation be successful. Properly managing your operation and communicating openly with your lender throughout the year will help keep your relationship with your lender a good one for years to come.