End of Year Loans

Amy Timmerman, Extension Educator Author

12/13/2024 Added

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As the year draws to a close, many producers rely on operating loans, or lines of credit, to finance essential expenses when cash flow is tight.

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[00:00:00.000]Today’s Extension Update is from Amy Timmerman,
[00:00:03.000]Cropping and Water Extension Educator covering
[00:00:05.040]Holt, Boyd, Brown, Rock, Keya Paha and Cherry Counties.
[00:00:09.660]As the year draws to a close, many producers rely on operating loans,
[00:00:13.660]or lines of credit, to finance essential expenses when cash flow is tight.
[00:00:18.902]These loans function like credit cards but usually come with lower interest rates.
[00:00:23.280]An operating loan is a short-term financing tool -
[00:00:27.040]often lasting less than a year -
[00:00:29.182]designed to help manage business cash flow.
[00:00:31.840]Borrowers are usually granted a pre-set limit they can draw from
[00:00:36.120]and repay multiple times throughout the year,
[00:00:39.240]primarily for purchasing inputs rather than
[00:00:41.500]long-term assets like land or equipment.
[00:00:44.360]However, as the year ends, it's crucial to navigate
[00:00:47.780]the potential pitfalls associated with these loans.
[00:00:51.000]Here are some key considerations to keep in mind:
[00:00:54.300]1. Understand Your Loan Limit
[00:00:56.900]As many farmers and ranchers take advantage of pre-paying expenses
[00:01:00.900]to minimize tax liability, it’s essential to know your operating loan limit.
[00:01:06.520]Ensure that your planned purchases align with
[00:01:08.700]this limit to avoid unexpected complications.
[00:01:12.380]2. Know Your Annual Percentage Rate.
[00:01:15.640]Pre-paying expenses can lead to carrying costs for several months.
[00:01:19.534]Familiarize yourself with the annual percentage rate
[00:01:23.094]or interest expense for each loan.
[00:01:25.839]It is often prudent to select the loan with the lowest annual percentage rate.
[00:01:31.429]3. Avoid Too Many Lines of Credit.
[00:01:34.549]In addition to banks, many suppliers may offer
[00:01:37.769]lines of credit to facilitate input purchases.
[00:01:40.940]Managing multiple credit sources can become overwhelming.
[00:01:45.448]Develop a system to track each line of credit that you have.
[00:01:48.828]Stay informed about the terms and the annual percentage rate of these offers,
[00:01:53.818]as they may be less advantageous than those provided by your bank.
[00:01:58.718]Additionally, ensure that any outstanding balances
[00:02:02.018]are accurately reflected as liabilities on your balance sheet.
[00:02:06.298]4. Use the Right Loan for Each Purchase.
[00:02:10.100]Operating loans should be reserved for input purchases.
[00:02:13.100]Avoid using these loans for personal expenses, purchasing intermediate
[00:02:17.100]and long-term assets such as equipment or land,
[00:02:21.100]or using them to make payments on other loans.
[00:02:24.340]Misusing operating loans can lead to financial strain down the line.
[00:02:28.040]And finally 5. Don’t Use Loans as a Substitute for Income.
[00:02:33.060]Utilize operating loans for expenses that are necessary and that can be
[00:02:37.060]covered by income generated throughout the regular production season.
[00:02:41.270]It’s essential to consider all outstanding debts and
[00:02:44.210]have a solid repayment plan in place to maintain financial stability.
[00:02:49.541]By staying informed and cautious, producers can effectively
[00:02:53.541]navigate the challenges of year-end financing and
[00:02:55.760]set themselves up for success in the upcoming year.
[00:02:59.739]This has been Amy Timmerman with Nebraska Extension.

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End of Year Loans

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