By Madison, Ag Lending Group
Most farmers can tell you their yield, their cash rent, and roughly what the combine's worth. Fewer can walk through their own balance sheet and explain what a lender is actually going to focus on first. That gap is worth closing, because it changes how you prepare for a financing conversation instead of just reacting to whatever questions come up.
We Look at Liquidity Before Anything Else
Before we get to your total net worth, we're looking at current assets versus current liabilities — essentially, can this operation cover what's due in the next twelve months without selling off long-term assets. A farm with strong equity but weak liquidity is a farm that could get forced into a bad decision the first time a bill comes due at an inconvenient moment. This is your working capital position, and it's usually the first number we calculate.
Then We Look at How the Assets Are Valued
Cost-basis balance sheets, common on tax-prepared financials, understate what your land and equipment are actually worth. We prefer market-value balance sheets, or at least a supplemental schedule showing current fair market value alongside book value, because it gives a much more accurate read on your real equity position. If your accountant has only ever given you a cost-basis statement, ask for a market-value version before your next loan conversation — it often changes the picture considerably.
Term Debt Coverage Ratio
This measures whether your farm's earnings can actually cover its debt payments, not just whether your assets exceed your liabilities on paper. A ratio above 1.25 is generally considered comfortable, meaning your income covers debt service with room to spare. Below 1.0 means the operation isn't generating enough earnings to cover its own debt payments from farm income alone, which is a real red flag regardless of how strong the balance sheet looks otherwise.
Off-Balance-Sheet Items We Ask About
Personal guarantees on other entities, leases that function like debt, and contingent liabilities from co-signing for a family member's operation don't always show up clearly on a standard balance sheet, but they affect your actual financial position. Be upfront about these when they exist — they come out during underwriting eventually, and it goes better for everyone when you raise them first.
Building This Habit Early
Farmers who update their balance sheet annually, ideally at the same time every year so land and equipment values are compared consistently, walk into financing conversations with a much clearer sense of where they stand. If you've been putting this off, year-end is a natural time to sit down and do it.
We're glad to walk through your current balance sheet with you before you're in the middle of applying for anything, just to help you see it the way underwriting will.
A strong balance sheet opens doors, whether you're looking at a farm refinance or a land-backed line of credit.
About the author: Madison grew up in agriculture, turning irrigation lines in her family's orange and almond orchard in Central California. Today she helps farm and ranch families across the country find financing that fits their operation at Ag Lending Group, a family-run farm financing advisor based in Phoenix that has been working with producers since 2016. Get in touch.
