If you’re a farmer or rancher, your bills are never-ending. From budgeted costs like feed and fertilizer to unplanned expenses such as machinery repairs and vet bills, you may lay out a lot of cash before you receive any income.

A revolving line of credit (RLOC) is a popular way to manage your cash flow while financing all those expenses.

This type of loan functions like a credit card, but without the high interest rate.

“It’s basically a way to finance expenses until you sell your crop or livestock,” says John O’Brien, Texas Farm Credit chief credit officer. “But unlike traditional loans, you only pay interest on the money you use.”

Clint Walker, vice president of lending at Legacy Ag Credit in Canton, Texas, notes that a revolving line of credit is useful for medium-size and part-time farmers and ranchers, as well as large producers.

“For example, a midsize hay producer might have labor, fuel and fertilizer expenses all year and sell their product in fall and winter,” Walker says. “A revolving line of credit would help this producer manage cash needs while minimizing interest costs at the same time.”

How does a revolving line of credit work?

A revolving line of credit — sometimes nicknamed a revolver — is an open-ended operating loan that’s preapproved for a specified sum or predetermined spending limit. The available loan balance decreases as you make withdrawals and increases as you pay the money back. Funds can be advanced, paid back and re-advanced up to the loan’s maturity date.

The best part: You only pay interest on the funds you withdraw, not the total line of credit. There is no set monthly payment with revolving credit accounts, although interest accrues as with any other credit.

When is it useful?

In an agricultural operation, a revolving line of credit can provide day-to-day liquidity and fund ongoing expenses when the production cycle and timing of sales create cash flow challenges. A “revolver” may be used to finance purchases or receivables — products that have been delivered but not paid for yet.

What are the RLOC terms?

The term or loan period for a revolving line of credit is generally one year. However, it can range up to three years or even longer for commercial operations or those that have long production cycles, such as timber operations.

What’s the difference between a regular line of credit and a revolver?

With a nonrevolving line of credit, the borrower makes withdrawals throughout the term of the loan. As principal payments are made, funds do not become available again to re-borrow. A nonrevolving line of credit is most often used to fund farm inputs, supplies and budgeted expenses for the current operating cycle.

How is a revolving line of credit secured?

RLOCs can be secured by assets, including:

• Inventories
• Accounts receivable
• Equipment
• Real estate

How are interest payments calculated?

The interest rate is variable and charged only on the exact amount of money you use, when you use it — not on the entire credit line. In this way, it’s like a credit card.

What are other features of a revolving line of credit?

• There is no fixed repayment schedule on the principle. Interest payments are usually due monthly or quarterly.
• The credit limit is based on the borrower’s creditworthiness, just like with any other loan.
• A revolver offers more flexibility than a traditional loan. The borrower can spend on various needs, including unbudgeted expenses, without having a specific predetermined purpose.
• It can safeguard against future cash flow problems.

Ask your loan officer how a revolving line of credit can be a useful financing tool for your agricultural operation.

— Staff