If you’re a farmer or rancher, your bills are endless. From budgeted costs like feed and fertilizer to unplanned expenses like machinery repairs or vet bills to budgeting for planting and harvesting season, you may set a lot of cash aside for such costs before receiving any income. This is where a revolving line of credit becomes an indispensable tool for agricultural operations, offering the flexibility needed to navigate the ups and downs of farming.
A revolving line of credit (RLOC) is a popular way to manage cash flow while financing all those expenses—this type of loan functions just like a typical credit card but without a high interest rate. In addition, RLOCs are essentially a way to finance your Colorado farm’s expenses until you sell your crop, livestock, or product. Unlike traditional loans, you only pay interest on the money you use and nothing more, so it’s a helpful tool for any ag operation’s business to stay sustainably successful.
For example, a midsize-sized potato producer might have labor, fuel, and fertilizer expenses year-round, but they don’t sell their product until harvest in the Fall. A revolving line of credit would help this producer manage their unique cash needs while simultaneously minimizing interest costs. The same goes for a YBS ag business or a large rural conglomerate farm as well. No matter the size of your local business, an RLOC could make a big difference in your family’s ag operation growth.
How does a revolving line of credit work?
A revolving line of credit, sometimes called a revolver in the financial world, is an open-ended line of credit or operating loan that’s pre-approved for a certain amount or a predetermined spending limit. The available loan balance decreases when you make withdrawals and increases when you repay any money. Funds can also be provided in advance, repaid, and then advanced again until the loan’s maturity date. This provides quite a flexible solution for Colorado farmers looking for some financial assistance.
The best part: You only pay interest on the funds you withdraw, not the total credit line. Revolving credit accounts do not have a set monthly payment, although interest accrues like any other loan. So, you essentially receive the benefits of an RLOC with the benefits of a credit card without any interest. Win, win!
When is it useful?
In agricultural operations, a revolving line of credit can provide day-to-day liquidity and finance ongoing expenses when the production cycle and timing of sales create cash flow problems. For example, RLOCs are convenient when your operation’s income is low, but your output is high. A “revolver” or RLOC can be used to finance purchases or receivables, also known as products, that have been delivered but not yet paid for. This provides farmers and ranchers a solution to receiving goods or funds early before they can pay them back.
What are the RLOC terms?
The maturity or borrowing period for a revolving loan is generally one year. However, it can range up to three years or more for commercial operations or operations with long production cycles, such as timber. Your specific industry’s production timeline and seasonality are addressed before you sign any RLOC contract.
What’s the difference between a regular line of credit and a RLOC?
With a nonrevolving line of credit, the borrower makes withdrawals throughout the loan term.
Once the principal is repaid, the funds are not available for re-borrowing. A nonrevolving line of credit is most often used to finance agricultural inputs, supplies, and budgeted expenses for the current operating cycle.
How is a revolving line of credit secured?
RLOCs can be secured by assets, including:
- Inventories
- Accounts Receivable
- Equipment
- Real Estate
How are interest payments calculated?
The interest rate is variable and is only charged on the exact amount of money you use when you use it, not on the entire credit line. In this way, it is like a credit card but not as steep in interest costs as many traditional credit cards.
What are other features of a revolving line of credit?
- There is no fixed repayment schedule on the principle. Interest is usually payable monthly or quarterly.
- The credit limit is based on the borrower’s creditworthiness, just like any other loan.
- An ag RLOC offers more flexibility than a traditional loan. A borrower can spend on various needs, including unbudgeted or unforeseen expenses, without having a specific predetermined purpose.
- It can protect farmers against future cash flow problems.
Ask your local FCSC loan officer how a revolving line of credit, or RLOC, can be a useful financing tool for your Colorado agricultural operation. Our team would happily help answer your questions and get a customized RLOC loan setup for you today!
Why Choose Farm Credit of Southern Colorado?
At Farm Credit of Southern Colorado, we offer revolving lines of credit specifically tailored to the needs of our local farmers and ranchers. Our team understands your unique challenges, so we work closely with you to create a financial RLOC solution that supports your agriculture business’s long-term success.
We provide:
- Personalized Service: We take the time to understand your business and financial goals so we can offer you a line of credit that fits your needs.
- Fair Rates: We provide subsidized interest rates and terms to ensure you can access the finances you need without undue burden.
- Local Expertise: As members of the local Colorado agricultural community, we are committed to supporting the growth and sustainability of farming and ranching throughout the region. This is our home, too, so we know the nuances of the area better than anyone else.
An RLOC is more than just a financial instrument; it’s a strategic resource that can help you manage cash flow, cover unexpected expenses, and take advantage of new opportunities as they arise. At Farm Credit of Southern Colorado, we provide the support and expertise you need to keep your ag operation running smoothly, no matter what challenges come your way.
To learn more about how a revolving line of credit (RLOC) can benefit your local farm or ranch, contact us today to speak with one of our experienced loan officers. We’re always here to help!