How to Control the Financing Costs of Operating Inputs on the Farm

All the costs that you incur when you know those plants are growing all the way through to harvest. And when I used to be a hog farmer, a big part of my input cost was the feed. That's right, the feed was the biggest portion of my cost. So it's those kind of things. And once you ended up selling, whether it's your crop or your livestock or whatever it may be that you're producing, you have to pay that operating loan back.

Today I wanted to speak about how to control the financing costs of operating inputs on the farm for most of you farmers. You know you're going to think of those as your, as that as your operating loan. Now if you're not a farmer, there's going to be a lot that I go through in this case study that's applicable to any business. I'm Dan Allen and I'm with the Senate Financial and I am an infinite banking practitioner. Today I just wanted to speak to farmers predominantly about their operating loans and how they could change things. So let's just start with. First you need to understand that with the infinite banking concept that allows a person to control their cash flow not by borrowing from a bank, but from a financial entity that they co own. And while this happens, your capital continues to grow because you've never withdrawn it. This creates a powerful lifelong compound effect. You and I both know that when you borrow from a bank, they charge you interest and there's usually some fees and well, rightfully so, they have gone to the trouble to capitalize, have access to this pool of money that you can access. And so when you tap into that, you pay interest and you do it on their terms. And the reason why you have to tap into it is simple. You haven't built your own reservoir or pool of capital that you can access for whatever it is you're going to do as a farmer, you're going to be know that quite often you'll have a multitude of different loans and debts. Some will be for land, some will be for equipment. But the one I want to focus on today, and it fits really well with the infinite banking concept, is the operating loan. That's one that you take just to help you with input costs. So when you use the infinite banking concept, you think back about how it works. Now you flip this whole thing in your favor. It starts by creating your own pool of money and it ends up with you controlling that destiny on your farm. When you do that, you end up recapturing the cost of interest and other things, fees and such. Best of all you end up with control. So when we think about an operating loan specifically, we know that you get access to a sum of funds, whatever that may be set up that you've set up. And sometimes those funds come from a bank, other times you'll actually have it set up with someone like a, you know, a seed provider or someone else. They will actually loan you the money you need to buy that product so that you can put it in to your operation. So that just gives you access to, you know, the capital that you need to put whatever it is you do in farming into production. So whether that's like a crop farmer, it's for putting all the seed, all the costs that you incur when those plants are growing all the way through to harvest. And when I used to be a hog farmer, a big part of my input cost was the feed. That's right, the feed was the biggest portion of my cost. So it's those kind of things. And once you ended up selling, whether it's your crop or your livestock or whatever it may be that you're producing, you have to pay that operating loan back. So part of that cash flow will go to pay off the principal and the interest that was incurred while you had that operating loan out. So we're not going to change that. And this concept doesn't change that. You're still going to borrow. You're just going to borrow from an entity that you co own and it's going to give you a lot of other positive attributes and you're going to pay it back the same way. And when you do that, that entity just gets stronger for you. So let's talk about one of the advantages of having access to a pool. Even the way you have it structured now with the bank or whichever financial institution that you have it structured with, what's the advantage of that? Well, it allows you to manage what you need to manage on your farm. So you think about how costs keep going up and they are input costs are getting higher and higher. So it's great to have access to a pool of money that you can leverage to put costs into whatever production you're doing on your farm. Now, some of the downsides that comes with the conventional way of doing that, which is through a financial institution that you don't control, is timing. Now when you think about timing, and I've heard this from a lot of farmers, it's like when that bank note becomes due, it may not be the best time to sell your crop or your livestock, but then you know, you have that Obligation, So you sell some of it just to pay back your operating loan. And it would have been better if you could have waited a month or two or three or whatever that may have been. And the other thing is, it's the collateral that you have to tie up. Other assets that you own get tied up in collateral for that operating loan. And so when you think about what we're going to look at here with this case study, what changes is when you're born from a financial entity like the one that we teach in infinite banking, you build up a pool of money that you can control, and the cash value is there, you get to access. And you don't have that timing issue anymore. You could pay it back a month later than what you normally would, two months later, three months later, you get to make that choice. Now, I'm always going to encourage you to pay it back, because if you don't, well, who wants to be part of a bank that people aren't paying their loans back? You need to do that because you want to be able to access that funds again for the next year. And the other thing it does, that particular contract that we use for this process, your collateral is part of that contract. So you don't need any other collateral. It will be included in that contract. So it frees up other assets that you've had as held as collateral for you to operate your farm. So with that, let's just go and have a look at this case study that I wanted to walk through with you today. So this is a case study around farm operating loan. And this is a very specific one. I built it in a way that hope gives you a good understanding of how this could help you on your farm. So let's just get right into it. And in this case study, what I've used is a couple. And this couple, they're grain farmers, and their names are Sarah and Jonathan. And their operating loan annually is $500,000. So now I take you back. And it's just like they've gone through the process of understanding how this concept works. And once they understood it, they said, okay, how can we start to apply this on our farm? So in conversations we landed on, well, a good place for you to start would be to gain control over your operating loan. So that's what we set out to do. Now, we also looked at a multitude of things. What's a reasonable timeline to do that? And how much could you as a couple put into capitalization to build that pool? How much could you effectively do each year and it's not like they're not going to get access to some of that capital that they put in right away. They will. And so we came up with, in order to get your objective, they wanted to be able to do this within 10 years and they felt comfortable being able to capitalize it at $50,000 a year. So what we decided to do is we were going to start a high cash value, dividend pay and life insurance policy on both of them. And each one of those premiums each year would be $25,000. So that's an outlay of $50,000 a year. And we're going to do this for 10 years. That's the timeline that we've got set up in this case study. So after 10 years they would not be putting any more capital into this example. Now we'll get into this later. Once they get through 10 years, they'll want to put more capital in because they'll understand how effective building that pool capital could be for them and their farm. So they're going to want to do that without a doubt. Now let's just look at how this would work. So we're going to start with, you know, year one, month one. So year one, month one. What have they done? Well, they put in $50,000 total into their banking system, their reservoir that they're building. And right away, I'm talking within days, within that first month after putting that money in, they can access $23,500. So that's one of the attributes early on that you even get access to some of that value that you've started to build within your system. Now when you're talking to, I talk to farmers, it comes around to other assets they buy. They're very aware that there's a cost to acquiring that asset. So if you think of buying land or some equipment, they realize it's going to take them years to actually pay for that asset. And this one very similar, it's a separate entity and they're starting to build their value to a point where they have an asset that provides for their business. So there's a cost of capitalization and they're very much aware of that. And we're just going to walk through these next few years and just have a look at how it works out for Sarah and Jonathan. So right away they borrow that much, then we jump ahead basically five years. So this is after they paid their sixth year premium. So it's at the start of the six year and they put out into their system. So their deposits into Their banking System, they put $300,000 at that stage into it. Now all the way through these years they've been taking that policy loan, they've been paying it back with interest just like they would do with their loan other the loans that they're presently using. So they haven't changed that. And what they've started to do is they've changed their dependency on those other third party lenders. So at this stage, and this is like just after five years is over the first month after that start of the sixth year, they now have access to $251,000 in their own banking system. So effectively at this stage they can control half of what they were putting out into their operating loan each year. So they've already swung that pendulum, it's got towards where it's 50, 50. And so they're much less dependent on lenders already at this stage of this objective. So let's just jump out and go right to the 10th year. So this is the start of the 11th year. They've been through 10 years. They put in $50,000 just like we talked about, $25,000 for each of them per year. That's 50 a year for 10 years. They put $500,000 into their own pool where that it's building value. Well, how much could they access at that point? Well, as you can see, it's gone to $530,000. Their value is more than that, but that's what they could access for a policy loan. So they've got their objective, they've achieved their objective at this point. And that's for the sake of this case study. We're not going to put any more capital in. They're just going to start utilizing this system for their operating loan and you're just going to see how hey, it could work. So let's just jump out. And I, you know, I went out another 10 years, so that's 20 years out. And it looks like they've only still put in the 500,000. They haven't put more in this case study. And now they have access to 770+ thousand dollars. And that would be a great asset for this farm. You know, just keeps on getting better and you know, they are not putting more in. Sure, they're utilizing it every year they're utilizing it and they're paying themselves back in order to get to this great tool and access to capital. That's what we're all about here is access to capital. So it's working very well for them. And even if you take and jump out another 10 years, you can just see how that value just keeps on getting better. And earlier I'd said, well, what are some of the other benefits that this family is going to get from this? And one of them would be this one. So if you just think about adding more capital when I talked about that 10 year window, and I said it's highly unlikely when they get through 10 years of capitalization, they're going to stop putting capital in because at that stage they're going to understand how good this pool of money is able to support their farm. And if they just put the base premium in, which when you add it up for those two policies would be just under $21,000 in the 11th year, that would give them access to $44,000 in increased cash value growth. Now when you think about that, how often would you put $1 into something and get access to more than two? Wouldn't you keep on doing that? So they've got that ability at that stage they can keep on capitalizing this thing. And if they do, the numbers will be much better than what I showed in this little table. So that's just one of the other benefits that they have. And another one that I wanted to speak to on top of everything else is this one they put protection on. God forbid anything happens to either one of them.

All of those debts that you have in your farm, you probably already have some kind of insurance against them. Well, this one again provides that plus more. So you can see right off the start, combined data had a million dollars of death benefit protection. And by the time the 10th year is done, they would have over 2 million. And even if they didn't put more capital in, it would still maintain that kind of a level of death protection for whatever other loans they have or just life in general. So with that, that's kind of the summary of the case study that I had for you today. And the other thing is, I just wanted to encourage you to.

Get this book and really understand how you can use this concept in your life. If you're a farmer and you really want to read something about farming and this concept, here's a great book. We have this book, it's available in our bookstore. It's by a great colleague out of the U.S. mary Jo Erman, and she lives in North Dakota and she wrote this book based on Nelson's book. It's got some really good case studies in there that you can go and watch, listen or read I should say. But yeah, just some great information. So I'm just going to encourage you to, you know, if this interests you, you know, just what questions, put them in. You know, what questions you have related to what I shared today, put them in in the comments below and, you know, just take in more of a content.