When I meet with producers, often the discussion can focus around expanding and growing the operations. However, the question often becomes, can I afford to grow, and does expansion truly meet my business and financial objectives. These seems like straight forward questions, but often in the excitement of expansion, these objectives are often lost.
The first question you need to ask yourself is how do you plan on expanding? The “how” has many different components, and becomes the base for the entire project.
You will also want to consider why you want to expand? Do you need to grow your operations for succession planning or is it required to stay competitive in the market.
Do you have enough land? If you don’t, can you buy more? What about leases? If you can’t get more land in your area, can you get land further away? If so, how would that work? Once you know your expansion strategy, we can begin to talk about the numbers.
What you own and what you owe
This is the easiest place to start. Sit down and make a list of all you own and what you owe. For what you own, don’t forget to include cash in your bank account, your land, your operations equipment, any investments you have made over the years, your current herd’s value and your crop inventory.
For your debts, make sure you know how much you owe on each loan and how much you pay on the loan each year.
Next, compare the two. Is what you owe 80% or more of what you own? If so, it may be hard to get a loan to expand your operations.
Crunching the Numbers
Not everyone enjoys figuring out the numbers, but it is something that you should pay attention to. First, think of how much your new operations will make. What will your sales be? How much will you get from government program payments or government rebates? What other sources of cash will your new operations generate?
Next, think of what your bills will be like. What will you pay to feed your cattle? How much cash do you need to make your insurance payments, repay debt, pay your vet? How much money do you need every month to just live?
Once you’ve done this, look at your revenue in comparison to your expenses. Are you earning more money than you are spending paying bills? Or will your bills be more than your operation makes? If you are spending more than you make, your expansion may not be viable.
Taking on new debt
If you don’t have enough cash to finance your expansion yourself, you’ll likely need to secure external financing.
The good news is that there are a lot more financing alternatives available to you than there has been in the past. So don’t be afraid to shop around and make sure you’re getting the loan that fits your operations.
Some financing options include;
- Traditional Term Bank Loans – This is traditional bank financing
- Alberta Breeder Finance Loans – These can be quite flexible as the cattle being financed can be held as collateral and features a minimal security deposit at 10% and low interest rates.
- Advanced Payments Program (“APP”) – These loans can include an interest free portion of the overall loan.
- Agricultural Financial Services Corporation (“AFSC”) Loans – These loans can feature no annual fees, flexible payment schedules, and no penalties for unscheduled repayments. Some interesting options worth checking out include the Next Generation, Developing Producer, and Alberta Producer loans.
- Loans from family members – Never overlook the generosity of family members. Just remember, if you are mixing family in with your operations, it pays to have a professional draft the loan agreement, including repayment terms, interest rates, and what happens if you want to pay them out early or if you default on the loan. This way, everyone knows what they are agreeing to.
What the Lender Wants
If you are applying for a non-traditional loan, take a look at the application form and see what information each lender will want from you. If you aren’t sure of where to start, get some of the following information together:
- Corporate or personal financial statements. And if you don’t have any, your most recent corporate and/or personal tax returns can be substituted depending on the lender.
- Your list of what you own and what you owe, and
- How much you forecast your expanded operations will make and what your expenses will be.
So is bigger really better for you? Talk to your trusted advisor. They can help you figure out if expanding is possible, how to do it, and can answer any other questions you might have.
Ebony Verbonac is a Chartered Professional Accountant and Partner in KPMG’s tax practice in Lethbridge, Alberta. She can be reached at (403) 380-5700 or by email at firstname.lastname@example.org. She would like to thank Rebecca Sanford and Katy Jacklin of KPMG for their assistance with writing this article.