Please note: This article first appeared in the 2019 Summer Edition of Plain Dirt Newsletter and has been slightly edited to fit all of our audiences.
By Katie Dochterman-Moore, Loan Officer
Diversified income is an earning strategy that involves generating income from several different sources, rather than being reliant upon just one occupation. Sources of diversified income include, but are not limited to, the following: growing crops, raising livestock, construction, breeding puppies, and rent.
The main advantage of having a diversified income is the lower financial risk that comes with being dependent upon one source of income. For example, if there is a drought that affects corn crops, a farmer that grows corn, breeds puppies, and receives rental income from an investment property will typically be in a better financial situation than another farmer that only grows corn. This is because the portion of income that the first farmer receives from the puppies and rent will not be affected by the drought, whereas the second farmer’s entire income is negatively impacted.
Projected income refers to estimated earnings for a new business endeavor for which an individual has no record of past earnings to draw upon.
When submitting projected income for consideration, even though no historical record of earnings exists, it is helpful to have supporting documentation of the amount to be earned. For example, a signed lease agreement for a new tenant would be useful in indicating the monthly amount of income to be received by the landlord.
Farm Credit is unique in that we recognize all sources of income, including new business endeavors that do not have an earning history. We understand the importance of diversifying risk within your operation, and are here to help you make prudent financial decisions.
That being said, it is important to exercise caution when considering projected income. For example, does the life of the income match the life of the loan terms? Does the property need significant additional investments before it is able to generate income, and how do those investments alter the profitability of this venture? A prudent businessperson asks the question before diving into a venture that is outside their means.
If you have any questions about your current loan situation give us a call at 888.3339.3334.