Making Practical Use of a Feed Loan
Many dairy lenders will provide two separate loans to finance the operations on a dairy; a herd loan and a feed loan. The herd loan is intended to finance herd replacement cost and supplemental financing of general operating expenses. The feed loan should be reserved for the obvious- financing longer cycling inventories like hay and silage and occasionally, but rarely, commodities. Unfortunately, there are situations where the feed loan is used for other purposes or not used wisely. Here are a few things to consider:
1) All loans made by a lender are approved by the bank for a specified purpose – in this case to carry feed inventory for an extended period. It is not intended to purchase the new skip-loader, feed wagon or more heifers, as an example. Financing equipment and cows with a feed loan is a bad habit and can make your lender very unhappy and it violates rule #1 in lending, “Never finance a long-term asset with short-term money.”
2) As the feed is consumed, pay-down your feed loan accordingly. Failing to keep your feed loan balance in line with your feed inventory is one of the first signs to your lender that you might be having cash flow problems or have undisciplined spending habits. Neither are good and, yes, can make your lender very unhappy.
3) Take advantage of trade terms that feed suppliers might on occasion offer. Paying early and taking the discount is almost always a better decision. For example, let’s say you were offered terms of 2/10 net 30, which means a 2% discount on the invoice amount if paid within 10 days of the invoice date, otherwise the the full amount is due in 30 days. Let’s assume the annual interest rate on your feed loan is 6%.
Put your own numbers into the calculator above to see your annualized cost of failing to take the discount.
As long as the annual interest rate on your feed loan is less than the annualized cost of failing to take the discount, you should advance off your feed loan and take the discount. Now that is a wise use of your feed loan! And by the way, you should apply the same formula to all your supplier invoices that offer a discount for early payment.
Everything mentioned to this point talks about the daily “blocking and tackling” of managing a small but important piece of your finances. But, there is something even larger: lost opportunities. Maintaining equity in your feed loan keeps you nimble when buying opportunities arise, and they usually arise during a downturn in the dairy economy. Need I say more? Having the ability to purchase bargain feed by “writing the check, right there” is a great place to be.
Prudent business practices are, for some, second nature and for others a learned discipline. In either case, the wise use of your feed loan is a conscious decision to manage your finances with as much care as you give your dairy herd.