How Lenders Use Cross-Collateralization to Reduce Risk
For farmers and ranchers looking to maximize their borrowing power, ag lenders sometimes use cross-collateralization, a way to secure multiple loans with the same piece of land. This means the same piece of farmland can back more than one loan instead of being linked to just a single debt. This can open the door to more financing and better loan terms, but it’s important to understand how liens affect future borrowing.
“Many farmers have equity in their land that isn’t being fully utilized. Cross-collateralizing loans can help unlock that value for expansion, equipment upgrades, or operating costs.” – Trisha Lillie, Conterra Relationship Manager, Southwest Region
Why Do Lenders Use Cross-Collateralization?
By using cross-collateralization, lenders can offer farmers access to more financing while ensuring they have enough security in place. An ag lender might use the same piece of farmland to back more than one loan, rather than requiring separate collateral for each. This setup protects the lender while helping farmers make the most of their land’s value.
For example, if a farmer takes out a land loan and later needs an equipment loan, the lender might use the same piece of farmland as collateral for both. This could help a farmer qualify for more financing, while also giving the lender confidence that the loan is backed by solid collateral.
What are First-Lien and Second-Lien Loans?
“If you’re considering a second-lien loan, talk with your lender about how it affects your overall financial picture. Understanding lien positions and repayment structures can help you avoid unexpected roadblocks down the line,” advises Lillie.
A lien just means the lender has a legal claim to your land until the loan is paid off. In cross-collateralization, a farm or ranch may have first-lien and second-lien loans secured by the same assets.
- First-Lien Loan – This is the primary loan secured by the asset. If a borrower defaults the lender with the first lien gets repaid first from any sale of the property.
- Second-Lien Loan – This loan also uses the same land as collateral but takes a second position to the first loan in terms of repayment priority. If you run into financial trouble and can’t make payments, the lender with the first lien gets paid back first. That means the second lien lender might not get the full amount owed—or anything at all. Because second-lien loans come with more risk for lenders they often come with higher interest rates and stricter terms. That’s why it’s important to weigh the costs before taking on additional debt.
For example, if a farmer takes out a first-lien loan to purchase land and later takes a second-lien loan for operating expenses, both loans may be secured by the same farmland. If a farmer runs into financial trouble, the first-lien lender gets paid back first. That could leave the second-lien lender short, which is why these loans tend to have higher interest rates.
What are Some Benefits of Cross-Collateralization?
“Using the same land to secure multiple loans can give farmers access to more funding when they need it. This helps us offer better interest rates and more flexible financing options while ensuring the loan structure works for both the borrower and the lender,” continued Lillie.
- Higher Borrowing Power – Farmers may qualify for larger loan amounts since a single asset, like farmland, can be used to secure multiple loans. By cross-collateralizing, lenders can extend additional credit without requiring separate collateral for each loan, making it easier to finance multiple aspects of an operation while keeping assets in play.
- Lower Interest Rates – Because cross-collateralization reduces lender risk, borrowers may receive more favorable loan terms. When a single asset backs multiple loans, lenders have more security, which can lead to lower interest rates compared to unsecured financing options. This can be particularly beneficial in times of fluctuating interest rates or tight cash flow.
- Simplified Loan Management – Farmers can consolidate multiple loans under one lender rather than working with multiple financing sources. Using the same asset as collateral for different loans allows borrowers to streamline repayment schedules, potentially reducing the number of due dates and administrative tasks involved in managing farm debt.
What are Potential Downsides to Consider?
Increased Risk to Borrower – If a farmer defaults on one loan, the lender may have the right to seize the asset used as collateral, even if other loans tied to it are current. This means that even if a borrower is keeping up with payments on one loan, financial trouble with another could still put the entire asset at risk. Before you commit to cross-collateralization, take a hard look at your finances. Will you be comfortable managing multiple loans tied to the same land?
Limited Flexibility in Selling Assets – When farmland or other assets are pledged as collateral for multiple loans, selling or transferring ownership isn’t always straightforward. The lender may need to approve the sale, and part of the proceeds might have to go toward paying off the related loans. This can limit a farmer’s ability to make quick financial moves or liquidate assets when needed.
More Complex Loan Payoff – If a farmer wants to pay off or refinance one loan that’s tied to a cross-collateralized asset, they may have to adjust the terms of all loans using that same collateral. This can add extra steps and costs to the process, making loan management more complicated. It’s important to work closely with your ag lender to understand how cross-collateralization might impact future financial decisions.
“Farmers should always be clear on which loans are tied to their land or other assets. If you’re thinking about selling part of your property or refinancing down the road, check your loan terms to make sure you have the flexibility to do so without complications,” Lillie concluded.
Higher Costs for Second-Lien Loans – Second-lien loans may have higher interest rates because the lender is in a riskier position—if the borrower defaults, the first-lien lender gets paid first. This makes second-lien loans less attractive to lenders, so they often compensate by charging higher rates or requiring stricter loan terms. It’s a good idea for farmers to look at both the costs and benefits of a second-lien loan to see if it makes sense for their long-term plans.
Can Loans from Different Lenders be Cross-Collateralized?
Can Loans from Different Lenders be Cross-Collateralized?
In some cases, farmers can use the same land as collateral for loans from different lenders, but it all depends on lender agreements. Typically, the first lender holds the first lien on the land, meaning they have the primary claim to the asset if the borrower defaults. If a second lender agrees to provide financing using the same land as collateral, they would typically hold a second lien, meaning they only get repaid after the first lender if the land is sold due to default.
However, not all lenders permit second liens on land they’ve already secured. Commonly, first-lien lenders require approval before another lender can use the same land as collateral, while some may prohibit it altogether. If a second lender is willing to take on the risk, the loan may come with a higher interest rate. Before taking loans from multiple lenders, farmers should go over their loan agreements and talk to both lenders to fully understand the terms and risks.
What is a Subordination Agreement?
A lender holding the first lien on land can sometimes move to a second lien position if a new loan takes priority. This process is called loan subordination.
A subordination agreement is a legal document signed between lenders that changes the priority of claims on the collateral. In this case, the lender currently holding the first lien agrees to move to a second-lien position, allowing another lender to take the primary claim on the land.
This typically happens when a borrower refinances or takes out a larger loan that requires a first-lien position. Sometimes, a lender will agree to take a second-lien position if they believe the new loan will strengthen the borrower’s financial situation. However, not all lenders are willing to do this, so farmers should check with both lenders to ensure all parties agree to the new lien structure.
Should Farmers Consider Cross-Collateralization?
Cross-collateralization can be a valuable tool for improving borrowing power, but farmers should make sure they understand the risks. Understanding first-lien and second-lien positions is important when structuring multiple loans. Farmers should work closely with their lender to ensure they fully understand:
- How their assets are being used as collateral
- The repayment structure of each loan
- Any restrictions on selling or refinancing assets
Using the same piece of land as collateral for multiple loans can open up opportunities, but it also comes with potential challenges—especially when it comes to selling, refinancing, or restructuring debt.
Farm financing isn’t one-size-fits-all, and cross-collateralization is just one way to access funding. Before making any decision, go over your loan terms and talk with your ag lender to make sure it’s the right move for your operation. The goal is to ensure your financing strategy supports both your immediate needs and long-term success.
Thinking about using your land to secure multiple loans? Let’s talk. Our team at Conterra Ag Capital knows the ins and outs of ag financing and has a variety of options to build a loan strategy that supports your operation. Start a conversation with your Conterra relationship manager today.
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Disclaimer: Please note that the information provided in this article is for educational and informational purposes only, and should not be construed as financial or investment advice. While we have made every effort to ensure the accuracy and reliability of the information presented, Conterra Ag Capital and its affiliates make no representation or warranty as to the completeness, correctness, timeliness, suitability, or validity of any information contained in this article. You should always consult a qualified financial advisor, tax professional, or other qualified professional for advice on your specific financial situation.
