Financial Options for Ontario Sheep Farmers Eric Weber, OMAFRA

Finance Options for Ontario Sheep Farmers

Eric Weber, OMAFRA

Understanding how your farm business will be financed is an important factor to being successful. It is crucial when there are uncertain times that you have a full grasp on how your farm business is financed and what your financing options are if you need to access more capital. In this article we are going to examine what are some of your options are and how they can be used on your farm business.

Advanced Payment Program – Crop and Livestock

The Advanced Payment Program (APP) is administered by the Agriculture Credit Corporation and is used by farmers to help finance their crop and livestock input costs. The maximum loan request is $400,000 with the first $100,000 interest free and the remaining $300,000 at prime rate of interest. This program will provide funds up to 50 per cent of the market value of your crop or livestock. The APP loan is repaid once the crop or livestock has been sold. Due to recent changes, the maximum loan requests have changed based on what crop or livestock you produce, contact the Agriculture Credit Corporation for more details. For more information about the APP program, you can call 1-888-278-8807 or visit: https://www.agcreditcorp.ca/advance_payments_program

Commodity Loan Program – Crop only

The Commodity Loan Program (CLP) is very similar to the APP. The maximum CLP loan is $750,000 with a prime rate of interest. There is no interest free component of the CLP loan. The value of the CLP loan is based on 75 per cent of the market value of your crop. Livestock is not eligible for the Commodity Loan Program. For more information about the CLP program you can visit: http://www.omafra.gov.on.ca/ english/busdev/facts/commodityloanguaranteeprogram.htm

Canadian Agricultural Loans Act (CALA) – Equipment, Building, Land, Refinancing

The Canadian Agricultural Loans Act (CALA) is a government backed loan program provided by the federal government but administered through financial institutions. The program allows for government backed loans of up to $500,000 for farmers depending on the purpose of the loan. Interest rates can be cheaper than traditional commercial loans. For more information about this program and how and where you can apply, please visit: https://www.agr.gc.ca/eng/ agricultural-programs-and-services/canadian-agriculturalloans-act-program/

Lines of Credit – Crop and Livestock

A line of credit is used to provide funding to cover cash flow shortages, or inventory that would be sold within a year. Most lines of credit have variable interest rates depending on the contract. The payment terms of a line of credit are usually interest only. From a tax perspective, interest that was paid on a line of credit is fully deductible. Most financial institutions offer line of credit products to farmers.

Equipment Leases – Equipment only

Another financing option is to lease equipment. There are two main types of equipment leases: operating or capital. An operating lease is where you would pay monthly payments but do not own the asset. In a capital lease, there is a monthly payment as well as a buyout option at the end of the lease. If you choose to own the asset, you complete the buyout option which can be as low as a $1.00 payment, depending on the lease agreement. A capital lease would appear on your balance sheet, where as an operating lease would only show up on the income statement. Most leases that are used in the agriculture industry are capital leases. From a tax perspective, you do not own the piece of equipment, until you make use of the buyout option in a capital lease. Over the life of the lease (capital or operating), the monthly payments would be fully deductible.

Term Loans – Crop, Livestock, and Equipment

Term loans are normally amortized over a period of one to ten years. Term loans are mainly used to purchase equipment, but can be used to purchase crop inputs, feed, or livestock depending on the length of the loan. Interest rates for term loans can be variable or fixed depending on the agreement. Depending on the loan, payments can be made bi-weekly, monthly, semi-annually, or annually. In addition, payment terms can be either blended payment (principal and interest) or interest only with the balance of the loan paid at the end of the term.

Selecting the Best Option for Financing

One of the most important factors that will need to be considered when looking at financing options is debt suitability. Debt suitability is ensuring that the terms of the debt are similar to the life of the asset. For example, using your line of credit to purchase a new combine would lead to a cash crunch in the future as the life span of a combine is longer than one year. But using the line of credit to purchase lambs would be more suitable as the timeline to raise lambs would be within that one-year period. Not matching the terms of the debt to the lifespan of the asset, increases the risk that a farmer will have to suddenly pay the remaining balance of the debt. In the case of purchasing a combine, a term loan or lease would be more suitable than using a line of credit.

In conclusion, there are multiple options available to sheep farmers on how to finance various aspects of your operation. Talking with your lender or farm business advisors can help you determine what the best options are for your farm business. OSN

ONTARIO STOCKYARDS INC.

Box 1051, 3807 Hwy. 89, Cookstown, ON L0L 1L0 O ce: 705.458.4000 Fax: 705.458.4100 E-mail: info@ontariostockyards.on.ca Website: www.ontariostockyards.on.ca BRIAN PASCOE WAYNE SMALL Res: 705.878.7026 Phone: 705.435.1423 Cell: 705.878.6918 Cell: 705.435.8275 Total Livestock Marketing