Operation of a farm or any business requires financing input purchases and asset utiliza­tion. Farmers may borrow large amounts of money or invest their own money to buy land. Agricultural land is an appreciating asset typically valued at many times the annual rent it can generate from agricultural use. Farmers also invest and may borrow money to buy machinery, such as tractors, trucks and equipment, and buildings, such as grain storage. Machinery and buildings are depreciating assets that may provide needed ser­vices over a number of years and may have a smaller resale value through time. Farmers also invest their own money or may borrow money to purchase operating inputs, such as seed, fertilizer, chemicals, and fuel, or to rent equipment or hire services during the grow­ing period. The money used to finance the purchase of operating inputs is referred to as operating capital.

All capital used in the farm business comes at a cost. The cost of capital is time dependent. Interest is charged at some rate per period of time for borrowed capital. Interest is foregone on money invested by the farmer in the business. The interest paid to lenders is visible as a cash expense while interest foregone on owned capital is an opportunity cost. Owned capital could be used to pay off other loans and avoid interest costs or it could be invested in interest-bearing accounts.

Capital is a limiting resource for businesses. Without capital, farmers are unable to acquire inputs needed for crop production. Lenders typically require security for the amounts they lend. Non-depreciating assets such as land are preferred collateral. Depreciating assets such as machinery and buildings may also have value as collateral. Lenders may accept an ownership interest in the growing crop as partial collateral for operating loans. Other assets, such as other real estate and savings accounts, also serve as collateral for borrowed money. Interest on capital appears in the enterprise budget both as an operating expense for operating capital and as a component of the amortization of investments in machinery and buildings.

The net worth of any business, including farm businesses, can be defined as the total value of assets minus the total value of debt. An important implication of risk in agriculture is that crop losses reduce the net worth of the farm business. When losses exceed net worth, the farm business may no longer be viable and may be foreclosed upon by lenders, may enter bankruptcy, or may simply be unable to finance new production. Farmers with smaller net worth relative to the size of their farm may find it more difficult to borrow money and may have to pay higher interest rates. Such farmers may also select less risky crop mixes or less risky input combinations in order to reduce the probability of financial collapse. Acquisition of new machinery to produce a new crop or the allocation of land to a new unproven crop may impose capital costs and risks that are unacceptable to low net worth farmers.