Strong net worth isn’t enough: What lenders want to see before renewal season

A farmer walks into a loan renewal meeting feeling pretty good about the numbers. Land values are strong, equipment is on the books and total assets comfortably exceed total debt.

Then the lender asks a different question: How much working capital do you have?

Suddenly, the conversation shifts. It’s no longer about what the farm is worth on paper. It’s about whether the operation has enough cash and liquidity to navigate another growing season.

For farmers renewing an operating line or looking at equipment or real estate financing, the balance sheet helps answer both. It can show where the operation is strong—and where there may be pressure points that net worth alone doesn’t show.

Start with liquidity and working capital

A balance sheet shows what the farm owns, what it owes, and what’s left in equity at a given point in time. One of the first things lenders want to know is whether the farm can cover what’s coming due in the next 12 months.

Working capital is a key measure: Working capital = current assets − current liabilities

Lenders may also look at the current ratio—current assets divided by current liabilities.

The Farm Financial Scorecard considers a current ratio below 1.3 vulnerable, 1.3 to 2.0 a middle range, and above 2.0 strong. Those figures are guideposts, not universal lending requirements.

Working capital also has to be put in context. What is adequate for one operation may not be enough for a larger farm, so working capital is often compared with revenue or operating expenses.

The important point is that strong net worth does not necessarily mean strong liquidity. A farmer may have a lot of equity in land, machinery or livestock, but not much cushion to get through the coming year.

“With real estate values climbing over the past decade, many producers have built significant equity on paper,” said Thomas Eatherly, farm financial business adviser at Pinion. “But strong net worth doesn’t always translate into strong cash flow. A producer may have a high net worth and still have very little working capital available to cover operating expenses, make payments or respond to unexpected challenges during the year.”

Look beyond the debt balance

The balance sheet also shows how much of the operation is owned outright and how much is financed with debt.

A common way to look at that is the debt-to-asset ratio—basically, how much of the farm is financed by creditors. The Farm Financial Scorecard considers a debt-to-asset ratio above 60% vulnerable, 30% to 60% a middle range, and below 30% strong.

But the trend can be just as important as the ratio itself. Is debt increasing? Is equity growing because the operation is retaining earnings, or because land and equipment values have appreciated?

It’s not just how much debt the farm has. It’s what that debt is doing to profitability.

“The real red flag is when the cost or structure of debt starts working against the operation,” Eatherly said. “Higher interest payments increase cost of production, push break-evens higher and can quickly eat into profitability. That’s why it’s important to look not just at the amount of debt, but whether the repayment terms match the asset and the farm’s cash flow.”

Match the debt to the asset

The way debt is structured can matter just as much as the total balance.

Operating debt is typically used for annual expenses such as seed, fertilizer, feed, fuel, livestock purchases, and cash rent. Equipment and breeding livestock are generally financed with intermediate-term debt, while land and permanent improvements fit longer-term financing.

Problems can start when those timelines get crossed.

Buying a long-lived asset with cash or short-term borrowing, for example, can drain working capital even if the purchase increases total assets. Payment schedules should also line up with the timing of crop or livestock income.

Carryover operating debt deserves special attention. If an operating line can’t be paid back from the crop or livestock cycle that created it, refinancing may buy time—but it doesn’t fix the bigger issue.

That’s why the balance sheet should be viewed alongside income history and cash-flow projections. The balance sheet shows the debt. The rest of the records help show whether the farm can actually pay it back.

Bring the records that support the numbers

Getting ready for renewal season takes more than filling out a balance sheet.

A good lender package usually includes current and prior balance sheets, income information or tax returns, cash-flow projections, and a complete debt schedule. Farmers should also be ready to explain inventory values and revenue projections.

Before the meeting, take time to review major year-over-year changes. Why did working capital decline? Why did debt increase? Are asset values current? Can projected cash flow cover operating expenses and scheduled debt payments?

“Before renewal season, I want to know whether the numbers have been verified and tied out,” Eatherly said. “From there, a working capital statement that clearly shows current accounts receivable and accounts payable is important, along with a year-over-year comparison. If the financials changed materially from one year to the next, the producer needs to be able to explain why those changes happened and where the operation is headed.”

Sending reports ahead of the meeting can also improve the conversation. Eatherly recommends including a brief summary of the year, including weather conditions, planting progress, harvest results, yields, and other factors that affected performance.

If time is limited before renewal season, he recommends focusing first on working capital, operational changes that can improve profitability, and opportunities to increase efficiency.

At the end of the day, lenders are looking for more than a balance sheet. They want to know where the operation stands, where it’s headed, and whether it can generate enough cash flow to support the next production cycle.

The numbers matter, but so does the story behind them. Farmers who understand both are often in a much better position when renewal season rolls around.

Editor’s note: Keaton Dugan, a certified public accountant, advises farmers and agribusiness owners on strategic tax planning, succession strategies, and long-term financial sustainability. Whether the goal is to expand operations, transition ownership, or optimize tax structures, Dugan draws on his experience as a trusted adviser and his background working on his family’s multi-generational farm to deliver practical, tailored solutions. Contact him at [email protected].