Walking into your local bank or Farm Credit office, check in hand ready to deposit, usually feels pretty good to most farmers. It can be a relief, or even fun, to see your hard work turn into dollar signs in your bank account, especially when tight margins are looming over the farm economy.
But what happens if that check never comes? You provided your custom operating services or sold your crop, and now you wait. And wait. And wait. But the money isn’t coming. What do you do now?
When being "neighborly" starts to mean putting your own operation at risk, it might be time to take action. However, your ability to collect payment may depend on how well you knew and managed your rights throughout the working relationship.
Document the debt
Collecting a debt begins with setting clear payment conditions and procedures when you sell your farm product or provide your services. Whether via a receipt, purchase order or contract, document your farm entity’s name as the seller/creditor, the buyer’s legal name, what was sold or the service provided, the balance due and when payment is due. If you have other specific payment instructions, this is also a good place to include that information. Provide a copy, signed by both parties, to the buyer and keep one for your own records. This can help you prove that a debt is owed in the future.
Don’t wait too long
If the payment due date comes and goes, be careful how long you wait to take action.
In certain segments of the agricultural industry, there may be state or federal government protections built in for farmers, such as the Agricultural Producer Security Trust Fund in Wisconsin, or the Perishable Agricultural Commodities Act Trust, Packer Trust or Poultry Trust at the federal level. These protective programs may help to ensure farmers receive payment by providing money for reimbursement of unpaid sales or giving unpaid farmers "priority" over other creditors.
However, these trusts often require farmers to make a claim within a limited number of days of the missed payment. Miss the deadline, and you might accidentally give up that extra protection.
Timing can also matter when you are pursuing payment directly from your buyer or your customer.
When farmers are in the creditor’s seat, the money they are owed is often unsecured debt. That means the farmer doesn’t hold a mortgage or lien on a particular asset. They have no collateral, no security, hence the name “unsecured.”
If the debtor, the person who owes the farmer money, files for bankruptcy or is foreclosed on, “secured” creditors get paid first. If there isn’t enough money to satisfy those priority debts, unsecured creditors may be left holding the bag.
No collateral ... now what?
Since farmers are typically unsecured creditors, how can they protect themselves from being left out in the rain?
First, farmers who hold unsecured debts might want to pursue collections more aggressively or more quickly. A former colleague of mine used to say, “Sometimes you have to rob Peter to pay Paul ... and I’m Paul.” In short, when money got short, he aggressively pushed debtors to ensure his clients got paid first, since he knew that in liquidation, not all creditors would get paid.
Payments made within 90 days of a bankruptcy filing may also be subject to clawback as “preferential payments,” forcing the creditor to pay the money back into the bankruptcy estate to be distributed first to secured creditors. Taking timely action can be key to ensuring farmers get paid by struggling customers.
Alternatively, some state laws may also offer additional protection to custom operators through agricultural liens, such as a harvester’s or thresher’s lien. Some states’ laws are more generous, including priority payments for unique combinations of harvesting, husking, baling, drying, transporting and more, while other states’ laws provide no extra protection at all. These agricultural liens may give farmers who sold raw product or provided custom services a priority claim, elevating them to compete with or even beat out other secured creditors, like banks.
Even when an agricultural lien may apply, you may need to take additional steps to "perfect" the lien, such as filing with the secretary of state or register of deeds. You should work with an attorney to carefully consider which liens your work or commodities might qualify for and confirm the steps necessary to perfect your agricultural lien in these scenarios.
Because state laws on agricultural liens vary, farmers or custom operators may consider hiring an attorney to research and clarify the issue before a default even occurs. For a farmer, that ask might look like:
“I raise the following crops: . I sell those crops to (buyer). If my buyer(s) become insolvent in the future and don’t pay me, are there any special protections in my state, like agricultural liens or producer security trusts, to help me collect or have priority in payment?”
For a custom operator, that ask might look like:
“I am a custom operator, which means that I provide [specific type of service] service to farmers. If a customer becomes insolvent in the future and doesn’t pay me, are there any special protections in my state, such as agricultural liens, to help me collect or have priority in payment?”
These sample questions should be tailored to best fit your individual needs for your farm operation, but keep in mind that more questions might take more attorney time. A farmer or custom operator concerned with the cost of the research could ask an attorney to limit their research to an hour or two of work and then communicate results to determine if the farmer would like to have the attorney continue the research or provide a more detailed written summary.
Knowing what protections might apply can help you better consider your farm operation’s cash flow risk and how you might want to react if your customers fail to pay.
If none of these additional protections apply, the farmer-creditor may decide to pursue a lawsuit to obtain a judgment lien through the courts to secure their payment or to seek enforcement through other legal mechanisms. Here too, the timing can impact a farmer’s likelihood of getting paid if a debtor is liquidated.
Attorneys and debt collectors have a variety of tools and strategies to help collect unpaid debts, and this article should not be considered exhaustive or sequential. Farmers should contact their own attorney with facts about their specific situation to determine the best plan for their operation.
Being proactive
In summary, farmers should be aware of a few straightforward steps to prepare themselves in case a customer fails to pay. Document debts clearly and accurately. Take note when these debts come due and aren’t paid. Know whether there are additional steps you need to take if a debtor fails to pay, whether that’s filing a claim within a certain time frame, filing other documents to preserve your claim or even filing a lawsuit in small claims court or civil court.
When tight margins rear their ugly heads across the industry, being ready to proactively take steps to collect payments can make a difference for your farm or agribusiness.
