Learn how agricultural lenders measure repayment capacity with the Debt Service Coverage Ratio (DSCR) and why this cash-flow test is critical for operating and term loans.
You can own a lot of country and be equity to the brim, but if cash don't cover payments, then the outlook's lookin' grim. 'Cause the banker's simple question, when you strip away the chrome, is "Can this farm make payments and still feed the folks at home?"
Repayment capacity answers the most practical question a lender asks: will this farm generate enough cash to service its debt after covering operating expenses and family living needs? The primary tool is the Debt Service Coverage Ratio.
A common way to calculate it: (Net Farm Income + Depreciation + Interest + Non-Farm Income − Family Living Expenses − Taxes) ÷ Total Debt Service (principal + interest).
Even a farm with strong equity can struggle if cash flow won't make the scheduled payments. Lenders run pro forma projections based on realistic yields, prices, input costs, and other assumptions for the upcoming crop year.
Liquidity, solvency, and repayment capacity almost always get reviewed as a set. Strong coverage combined with adequate working capital and moderate leverage makes the most favorable credit profile.
How much of your outfit does the bank already own? The Debt-to-Asset Ratio is how lenders answer that question.
Read →Current Ratio and Working Capital to Gross Revenues — the two liquidity numbers your lender watches most closely.
Read →Cash vs. accrual, missing categories, depreciation differences — here's why your P&L and Schedule F drift apart, and how to close the gap.
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