Farming is business
Debt need not necessarily be a bad thing, in fact; it does serve a good purpose if taken up for the right reasons according to FNB's Christo Viljoen.
Debt has not always been viewed favourably and with good reason. This should however not deter farmers from taking up new loans if they think it could improve their operations FNB's head of agriculture, Christo Viljoen has said this week.
He presented the pros and cons of debt and schooled farmers on the differences between good debt and how it can help an ailing farming operation, and bad debt.
He said if farmers pay attention to improving the infrastructure of the farms, this could help generate additional income. “It is not easy to regain your loss when you pay too much for land.” Infrastructure improvements such as dams, fencing, solar, de-bushing, electrification and even buildings will also increase your productivity, effectiveness and profitability while a centre pivot used to plant Lucerne or maize or anything else, either to generate another stream of income or to round off the animals for the market, is another possible good debt,” Viljoen told farmers.
Switching the focus to bad debt, Viljoen also explained the key differences and advised farmers to not to incur expenses they would not be able to service. “Bad debt on the other hand is debt which, amongst others, finances your lifestyle and adds no value to your wealth over the years. It is also debt you cannot really afford and where there are no prospects that the new asset will pay for itself in the future. This weakens your financial position,” said Viljoen. Examples of bad debt according to him include vehicles that one would not really need, overseas holidays one cannot afford or any other purchases financed on a credit card. “Please do your homework and ensure it is really worth your while,” said Viljoen.
He also put out a checklist to farmers to gauge their affordability and risk appetites. “Can I afford the debt comfortably? This means two things, will I make more profit by taking up the loan than the cost involved in the loan? Would I be able to deal with interest rate changes? Will the loan improve my financial position in the long term? Will my farm be worth more if I take up the loan? Do I understand the risks of the debt and the terms and conditions involved in the loan?” Viljoen advised farmers to ask themselves.
“Make sure your farm can afford the good debt. In other words, the income generated by your farm must be sufficient to cover all expenses, including any other obligations you have towards the bank, the co-operative and other creditors. Good debt is paid with a strong cash flow from your business. You as the owner are paid last and not the other way around,” Viljoen said in closing.
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He presented the pros and cons of debt and schooled farmers on the differences between good debt and how it can help an ailing farming operation, and bad debt.
He said if farmers pay attention to improving the infrastructure of the farms, this could help generate additional income. “It is not easy to regain your loss when you pay too much for land.” Infrastructure improvements such as dams, fencing, solar, de-bushing, electrification and even buildings will also increase your productivity, effectiveness and profitability while a centre pivot used to plant Lucerne or maize or anything else, either to generate another stream of income or to round off the animals for the market, is another possible good debt,” Viljoen told farmers.
Switching the focus to bad debt, Viljoen also explained the key differences and advised farmers to not to incur expenses they would not be able to service. “Bad debt on the other hand is debt which, amongst others, finances your lifestyle and adds no value to your wealth over the years. It is also debt you cannot really afford and where there are no prospects that the new asset will pay for itself in the future. This weakens your financial position,” said Viljoen. Examples of bad debt according to him include vehicles that one would not really need, overseas holidays one cannot afford or any other purchases financed on a credit card. “Please do your homework and ensure it is really worth your while,” said Viljoen.
He also put out a checklist to farmers to gauge their affordability and risk appetites. “Can I afford the debt comfortably? This means two things, will I make more profit by taking up the loan than the cost involved in the loan? Would I be able to deal with interest rate changes? Will the loan improve my financial position in the long term? Will my farm be worth more if I take up the loan? Do I understand the risks of the debt and the terms and conditions involved in the loan?” Viljoen advised farmers to ask themselves.
“Make sure your farm can afford the good debt. In other words, the income generated by your farm must be sufficient to cover all expenses, including any other obligations you have towards the bank, the co-operative and other creditors. Good debt is paid with a strong cash flow from your business. You as the owner are paid last and not the other way around,” Viljoen said in closing.
STAFF REPORTER
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