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Considerations for New Barn Financing
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Financial standards have been around a long time and have a lot of history to support the merit for using these as guidelines. Make sure you understand these standards.


Source: GreenStone FCS Dollars and Sense Column in Michigan Farm News

Considerations for New Barn Financing

Buildings being constructed today are as different as the farmers that build them. Just look at a dairy farm where the facilities are quite varied on the same farm. These can include calf barns, transition barns, commodity sheds, and equipment workshops, to name a few. While these facilities are different from farm to farm, the decision making process on financing these structures should include the same basic principles. There are several things to consider for financing building projects.

The impact on your financial ratios is obviously a big consideration. In many areas, new house and building construction are only contributing about 70% of the cost to the appraised value of the real estate. This can have a huge impact on your owner equity and amount of collateral or down payment needed. After figuring in this 70% affect, how will the down payment and additional financing affect your working capital ratio? Will you fall below the 15% working capital to adjusted gross income ratio standard? Then, of course, there is the owner equity and cash flow margin ratios that need to be reviewed. After taking a hit of 30% of the project cost in net worth, will you still be over the 50% owner equity minimum target? What will 20-30% cost over runs on the project do to your financial ratios?

The length of financing will impact the above financial ratios. The decision on length of financing should include the economic and obsolencent life of the project. In other words, how long will this new structure physically last with normal care? How quick will the return on investment be? How long will it be before there is a better way to do it? Don’t kid yourself on these issues. Tractors can be resold if they don’t fit your operation. It’s kind of hard to do that with buildings.

When deciding the length of financing, consider the fact that tax advantages up front decrease cash flow requirements and you generally have no repairs the first few years. If you have the same payment for 20 years, after the tax advantages are gone and repairs start to add up, cash flow requirements can actually go up in the later years.

How much do current, (short term?), commodity prices influence the type of structure to be built? If we are on a higher plateau with commodity prices, maybe the traditional structures are no longer practical. For example, with $7 corn, is it more economical to store corn in uprights or bags, compared to bunk silos? How much is the spoilage at these price levels costing you?

The items above are some financial impacts to review after you have decided on the production benefits of the structure being planned. Financial standards have been around a long time and have a lot of history to support the merit for using these as guidelines. Make sure you understand these standards.