What Income Should You Show to Help Ensure You Can Refinance?

Aug 31, 2023

Farmers often consider refinancing their farmland loans or equipment loans as an opportunity to:

Improve cash flow and working capital
Consolidate debt into a single payment with a lower interest rate
Reduce monthly payments or potentially qualify for flexible payment options
Expand or improve an ag operation

How Much Income Do You Need to Have to Qualify for Refinancing?

There is not a specific, set amount of income you need to have in order to qualify for refinancing; the amount of income needed is not as important as how your level of income compares to your financial obligations.

All lenders will rely on some type of cash flow ratio that compares income, or how much cash you have available, to your obligations. This ratio is the key factor in determining if you have sufficient income to refinance. Below, we’ll walk through the process to calculate your income, your obligations, and your final loan qualification likelihood.

[Learn more about staying on top of your farm’s finances and maintaining your operation's financial wellness with our free templates and guides.]

How to Calculate Your Income

First, let’s define “income.” Income can refer to either gross revenue (how much you made) or to the net income (gross revenues minus expenses). However, neither of these figures accurately describes how much cash is available for you to make debt payments.

To determine the amount of “income” you have available to make payments with, you’ll want to use the following formula:

Gross Farm Income + Non-Farm Income - Gross Farm Expenses - Living Expenses + Depreciation + Interest = “Income” or “Cash Available”

Let’s delve deeper into the details of that formula by breaking it down into four steps below:

1. First, factor in ALL income sources, including:

Farm income
Income from non-farm sources, such as wage income, investment income, etc.

2. Next, subtract ALL expenses, including:

Crop and overall operational expenses
Administrative/overhead expenses, such as taxes, utilities, professional services, and other miscellaneous costs TIP: An easy way to check that you are capturing everything is to use your Schedule F from tax return records.
Living expenses

At this point, you’ll have a solid understanding of the amount of cash available to make payments.

3. Next, add back any depreciation and interest expense listed on tax return records, as most lenders will include these figures.

Depreciation: Because funds did not physically leave your operation, depreciation is considered a non-cash expense and can be added back to your cash available or “income.”
Interest Expense: Since a portion of your farm expenses will likely include interest expense paid, you can add this amount back to “Cash Available” as this amount will also be a part of your obligations.

4. Finally, run your calculations from steps 1, 2 and 3 above to see your final income or cash available total. It will look like this:

Gross Farm Income (Step 1)

+ Non-Farm Income (Step 1)

- Gross Farm Expenses (Step 2)

- Living Expenses (Step 2)

+ Depreciation (Step 3)

+ Interest (Step 3)

= “Income” or “Cash Available”

How to Calculate Your Total Obligations

Compile a list of ALL of your loan payments, including personal obligations such as home mortgages, auto loans and student loans. Annualize all payments so you can compare your total annual income to total annual payments.

How to Calculate Loan Qualification

To determine a final total, take the income total number you calculated earlier and divide it by your total annual obligations calculation determined above.

Loan qualification will require a ratio of anywhere between 1.0 to 1.50. However, the vast majority of loan programs will use 1.25 as a guideline. One way to think about this ratio is that for every dollar in payments, you have $1.25 to pay it with.

Using Historical vs. Projected Figures

The exercise described above can be completed on a historical basis using actual figures as well as on a projected basis using estimated figures for the upcoming year. Lenders will look at both, given that each is useful in calculations for different reasons.

Historical figures are important because they:

Indicate the income your operation is able to generate
Help determine if your projected figures are realistic

Projected figures are important because they:

Account for the most recent changes to your operation
Offer the lender an indication of what to expect going forward

Financial Solutions from FBN® Finance

With an average of 15+ years’ experience each in ag finance, FBN loan advisors are ready to talk to you regarding any questions you may have related to your farm finances, potential financial solutions or other financial strategies for your ag operation. They are deeply knowledgeable about farm land loans, farm equipment loans, operating lines, and other financial solutions that may be a fit for your farm.

Complete the brief form below or call 866-619-3080 to speak to a member of our team today.

Related Resources

Financing offered by FBN Finance, LLC and its lending partners. Terms and conditions apply. To qualify, a borrower must be a member of Farmer’s Business Network, Inc. and meet all underwriting requirements. Interest rates and fees will vary depending on your individual situation. Not all applicants will qualify. NMLS ID: 1631119.

The material provided is for information purposes only. It is not intended to be a substitute for specific professional advice. Neither Farmer’s Business Network nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in the material and any liability therefore is expressly disclaimed.

Travis Carlstrom