Managing a farm involves investing time and money toward creating a successful business. Of these investments, having enough money to cover farm needs or offset losses is a concern for beginning farmers. A common resource for new managers to obtain money, or cash, is by seeking a loan from a farm lender (creditor).
A loan is not simply a source of funds, but an investment in your farm business and its plans for success. By providing funds, lenders help to reduce risk concerns that a lack of cash can create. A loan helps to secure your ability to pursue production goals. However, by ensuring your ability to operate, a lender takes on an amount of your farm's risk from potential losses. For lenders to agree to such investments, they need to offset their risk concerns.
The primary risk concern to lenders is nonpayment by a farm due to limited cash. A lender will approach reducing their concerns in a way similar to that of a farmer, by pursuing risk management options. The best form of risk management for a loan is for the lender to secure an interest in your farm's collateral.
Michigan State University Extension Bulletin E-3426 Loans & Security: An Introduction to Farm Collateral reviews the basics of securing a loan and how to identify collateral on your farm. This publication also reviews how managing available collateral can reassure lenders investing in your business. These reviews include explanations of key phrases or technical terms frequently used in discussions of farm collateral.
Download the latest bulletin in the Beginning Farmers DEMaND (Developing and Educating Managers and New Decision-makers) to begin learning how to manage weather-related risks on your farm.
Categories: Michigan, Business