Whether you’re investing in land to plant a vineyard, finding a way to cover operating costs while your wine ages in barrel, or looking to update your equipment or facilities, the wine business can be a capital intensive endeavor. As your financial needs shift throughout the growing season, it’s important to find a financial partner who is able to structure a loan, operating line of credit or lease to support your operation’s cash flow.
What may surprise you is that there are lenders with wine industry expertise who can provide smart financial solutions to help your business grow and succeed for the long term.
Buying Land
Land has always been essential to the business of agriculture. In the wine industry, a recent decrease in the grape supply along with the associated jump in prices has made it more appealing to invest in vineyard property. Wine-related land sales have been “moderately strong” in Northern California this year and vineyard values have been stable.
“After last year’s crop loss, wineries are looking for vineyards to shore up their own supply,” said Deanna Martin, Vice President of Lending at American AgCredit.
Stronger land values can have a positive impact on your balance sheet. Rising land values equate to higher equity, which means a producer could leverage more equity in the event that they need financing.
Before making a large investment, you should first consider your cash flow, review your balance sheet and determine whether the decision makes sound financial sense. For instance, if you expect to have other capital expenditures in the near future, you might prioritize cash flow and decide to wait on the investment, said Martin.
Using a budget to plan income and expenses is essential for a business operator to make informed decisions. You can use a budget to know when you need to prepay expenses or hold inventory, for instance. A budget can also help you make decisions on whether or not you want to invest in a new piece of equipment, for instance, or if you can afford to buy a neighboring property in the next 6-12 months.
Financial Solutions for the Wine Industry
While many banks and lenders serve the wine industry, there are very few financial institutions with the level of expertise and commitment to agriculture that is found in the Farm Credit System. American AgCredit is the nation’s fourth largest Farm Credit lender with more than $15 billion in assets, including a large portfolio of clients in the wine industry.
Wine operators looking to finance annual operational expenses and inventory, or to free up cash for investments like expansion and capital improvements, might pursue operational financing in the form of a line of credit. Term loans are best used for smaller, short-term debt consolidations such as equipment purchases and property improvements (for example, installing solar). Leases are available for financing equipment, such as wine barrels and tanks. Long-term mortgages (15-25 years) are commonly used to purchase property or refinance existing debt.
Ultimately, you should use sound financial practices such as reviewing a budget regularly, comparing income forecasts with actual expenditures from previous years, and consulting with a financial adviser and trusted partners to reinforce the decision.
How to Track Your Financial Health
If you are planning to buy land, purchase or lease equipment, or finance your operating costs, you should be sure that your financial foundation is secure and stable. Lenders and financial partners will want to ensure that your operation is viable. These are the same metrics that you should be consistently tracking to ensure your business remains healthy.
What factors feed into the loan approval process? The first metric is cash flow to cover operating expenses. Next, your lender will consider the business’ debt service requirement, and then look at the funds you may need to reinvest in the business or to restart the next operating cycle.
“At the end of the day, your cash flow is what covers the ongoing needs of the business,” said Martin.
Next, lenders look at your balance sheet to determine the debt-to-equity ratio and how much debt your business could safely carry relative to equity. Finally, the lender will consider your operation’s liquidity.
“How much cash does an operation have on hand to cover the next 3-6 months of operational expenses?” said Martin. “Things can get tight if [the producer] is going week-to-week on covering expenses and the liquidity ratio helps tell a bank that picture.”
Working with an Ag-Focused Lender
There are clear benefits to working with a lender that focuses solely on agriculture, from the level of expertise and trusted partnerships to the way loans are structured. When you choose to work with American AgCredit, you are partnering with a team of wine industry financing experts, including lenders, underwriters and an in-house group of appraisers, all of whom are focused on delivering the best results for your business.
“The credit team is able to make informed decisions with the support of in-house appraisal staff, decades of land value knowledge and industry trends,” said Sara Clover, Assistant Vice President and Underwriter at American AgCredit. “Working together, underwriters and lenders provide an efficient loan closing process with continuity along the way.”
Beyond the expertise and customer service benefits of working with an ag-focused lender, you also benefit from an added layer of stability and a long-term commitment to agriculture.
“We really understand this industry and what matters to producers,” said Martin. “We work with clients through all the ups and downs of the agriculture business.”
For instance, if the wine industry is having a tough year due to circumstances like drought or wildfire smoke, then an ag-focused lender is uniquely positioned to stick with their clients in the wine industry. American AgCredit has a robust portfolio of agricultural loans across a diverse mix of commodities — beef, field crops, dairies, tree fruits and nuts, and many more — that spreads the level of risk across several commodities and regions.
Regardless of which lender you choose, it’s always important to work closely with your financial partners and check in with them about your business regularly. This could be a quick phone call or email to let your lender know how harvest is progressing, share a financial concern or to inform them about a new opportunity that’s come along.
“You want your lender to understand your business as much as you do, as they are a partner in helping secure the credit needed for your operation,” said Martin.
