University of Illinois Extension is guiding to help farmers understand their financial condition through balance sheet analysis as the Midwest agriculture sector faces another year of low profits.

A market-value balance sheet provides a snapshot of a farm’s financial condition by comparing current asset values to liabilities owed, according to Kevin Brooks, Extension educator in Havana.

Lenders use a traffic light system to evaluate farm financial health based on debt-to-asset ratios. Farms with debt ratios of 30% or less are considered financially strong, while ratios between 30% and 60% signal caution and may result in higher interest rates.

“A debt-to-asset ratio of more than 60% will make it challenging to secure a loan through traditional lenders,” Brooks said. Farms in this category may need to work with the Farm Service Agency as a lender of last resort.

Lenders also examine current ratios, calculated by dividing current assets by current liabilities. A ratio of at least 2.0 is considered strong, meaning the farm has $2 to pay each $1 of current debt.

Working capital provides another critical measure, representing the cash cushion farms have above expenses. Lenders typically require a 30% to 40% cushion to cover unexpected challenges.

Brooks emphasized the importance of honest financial reporting and maintaining strong lender relationships, especially during challenging economic conditions.

“Falsifying information on the balance sheet is a criminal offense,” he said. “Farmers have been convicted and imprisoned for bank fraud.”

Brooks advised farmers to keep lenders informed about purchase and debt plans, use realistic asset values and ensure balance sheets are consistent across all lenders.

For more information, contact Brooks at kwbrooks@illinois.edu or visit the Extension Farm Coach blog.