When is free money not worth it?
When it’s too much hassle in a business where time is money.
That’s the message I’m getting from a number of farmers I’ve talked with about why they don’t use cash advances, which seem like free money, in a theoretical sense.
In reality, the financial gain just doesn’t seem worth it to quite a few farmers who find cash advances too small, too distracting and too debt dilutive to pay off.
I’ve learned this after writing a column two weeks ago in which I posed the question, “Who doesn’t like free money?” and suggested farmers look closer at cash advances.
A number of farmers contacted me and told me exactly why they don’t use cash advances and why they are less popular than in the past.
I heard that they don’t work well for big and medium-sized farms. The proportion of farm financing that the $100,000 interest-free and $300,000 prime rate represents is too small to equal much savings for a farm with gross revenues of more than $2 million.
Even with smaller farms the program can seem a distraction, with the time spent on dividing debt sources and management seeming a poor investment of farm management time. There’s a real opportunity cost to every layer of paperwork added to the top of a farm.
For example, one Edmonton-area farmer I spoke with told me he isn’t a big farmer by local standards, but the advances are too small to be worth the time it takes to access and manage. His daughter, who farms less land, can find bigger savings by focusing the same amount of time on other parts of her farming operation than spending it on getting and paying back a cash advance.
A farmer from Portage La Prairie, Man., tweeted to me: “With interest rates so low, much better to negotiate an even better rate on all borrowing with credit union if they have all your business.”
And the paperwork issue, while being something that financial and management professionals commonly dismiss, is something that distracts many farmers from areas where better gains are possible, especially if it means another visit to the lawyer or accountant.
“Paperwork is a bit of an issue,” a Rumsey, Alta., farmer tweeted to me.
“Have to go to lawyer to get some stuff signed because of corporate setup on farm.”
This all explains to me why farmers aren’t taking the free money. It isn’t completely free, and it’s just not relevant to some farms.
Farmers aren’t dumb. If they aren’t doing something that seems smart, it’s probably because it isn’t that smart in reality.
Where do we go with this? I’m going to look at this question in 2019. Subsidized lending isn’t something farmers should be willing to give up. That’s a gift from the government gods.
Could the program be boosted and adjusted to make it relevant to big farms?
Or could big farmers be assumed to not need it, allowing the program to be modified to better fit the specific needs of young farmers and small farmers? Being something for everybody sometimes means not being great for anybody.
Or could it be evolved into just a backstop safety net program, there for just when it’s needed, rather than automatically triggered?
What would be most useful and most effective?
The program has been reformed in recent years, but what I’ve been hearing from farmers suggests to me that it would be a good idea to have a good look at the cash advance program and see if its fading popularity can be turned around.