**1. Introduction**

The interdisciplinary approach to financial energy (cf. [1]) allows for associating it with the general financial condition of the entity [2], which is influenced, among others, by the use of equity and external capital and the treatment of money as a source of energy [3]. Based on Korol [2,4], the paper adopts the concept of "*financial energy of a farm*" understood as its general financial situation. It mainly consists of having capital that enables agricultural activity, which is both the cause and the consequence of the financial and investment decisions of a given entity. Based on this concept, it was assumed that the use of external capital increases the financial energy of a farm, enabling the implementation of investment projects whose scope exceeds the level of the entity's equity.

**Citation:** Zawadzka, D.; Strzelecka, A.; Szafraniec-Siluta, E. Debt as a Source of Financial Energy of the Farm—What Causes the Use of External Capital in Financing Agricultural Activity? A Model Approach. *Energies* **2021**, *14*, 4124. https://doi.org/10.3390/en14144124

Academic Editor: Wing-Keung Wong

Received: 8 June 2021 Accepted: 5 July 2021 Published: 8 July 2021

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The appropriate level of financial energy of a farm is essential to start all processes related to agricultural activity.

The selection of the financing sources necessary to run a business, including agricultural activity, is within the scope of the entity's financial decisions. In the process of selecting forms and sources of financing, an agricultural holding may use many selection criteria. Opportunities to increase the financial energy of the farm, therefore access to capital, its cost, possibilities and limitations in acquiring are crucial at every stage of farm development. Both the establishment of a farm and its development require funding. Research shows that the lack of access to capital, including external capital, is the most important limitation in starting agricultural activity [5]. It is related to the low financial energy of the farm. Nevertheless, the relatively low use of external capital may also be related to the reluctance of farmers to incur debt [6]. Thus, the use of outside capital makes it possible to increase the financial energy of a farm and is determined, on the one hand, by its availability, on the other hand, the impact on its use is influenced by the farm's and the farmer's characteristics, with particular emphasis on behavioral aspects.

The aim of the study was to identify and assess the factors influencing the increase in the financial energy of a farm through the use of external capital, taking into account farmer's and farm characteristics. Due to the fact that agriculture is one of the key areas of importance in the context of the plan Transforming our world: the 2030 Agenda for Sustainable Development [7], the research thread concerning the factors determining farmers' tendency to get into debt is considered important. Sustainable development of agriculture requires investments that require capital, including outside capital. Therefore, the investment possibilities of a farm depend on the level of financial energy of a given entity; this energy can be increased by using external capital.

A farm, despite its specific nature, should be treated as an enterprise [8]. However, this specificity significantly affects the farm's financial energy and the selection of the structure of financing sources. In the case of farmers, the theory of the hierarchy of funding sources and the theory of partial adjustment are the most fully applicable to the explanation of financing decisions. The first one was formulated by S.C. Myers [9]. According to it, enterprises prefer internal sources of financing, and use external sources only when the demand for capital increases. This is due to the fact that there is an information asymmetry that can lead to under-investment, over-investment or value transfer. Sources that are lower on the list of preferences are not used until all the sources higher on that list are exhausted. The theory of the hierarchy of sources of financing emphasizes the importance of the asymmetry of information between the capital giver and the capital buyer, which is also noticeable in the case of entities from the agricultural sector [10]. This theory, however, does not take into account the advantage of outside capital over own capital, resulting from the existence of the financial leverage effect or the tax shield. Due to the specific nature of farm taxation, it is considered that they use the financial leverage effect by supplying their business with external capital when the interest rate on bank deposits is lower than the return on equity [11]. The theory of partial adjustment assumes conscious shaping by farms of the proportion between equity and debt. Benefits from external capital may be higher than from own capital, however, assuming that the tax system in agriculture makes it possible to deduct financial costs from the tax base. Moreover, the asymmetry of information affects the use of equity in the financial strategies of entities from the agricultural sector [8]. The phenomenon of low use of external capital to finance activities is characteristic of agriculture [6,12–15].

Internal sources are of dominant importance, which are determined by the value of the farmer's household income (income from agricultural activities and those collected outside of it) and the tendency of farmers to give up current consumption [16]. The research results confirm that farmers are characterized by a relatively high propensity to save, and the accumulated savings are spent primarily on financing investments carried out on the farm [17]. The size, determinants of creation and factors determining income in agriculture are the subject of research by many scientists (see e.g., [18–23]). In the context of financing

agricultural activity of farms located in the European Union, sources that relate to direct support systems should also be distinguished, because direct subsidies are a significant part of farm income [24,25]. In combination with the possibility of using European Union assistance, they constitute an important source of financing for agriculture [26–28]. These activities, together with domestic aid for financing agriculture, according to Zinych and Odening [29], fit into the concept of soft budget constraints [30]. This concept focuses on the state co-financing of various entities, which helps their development. In terms of external capital, farms mainly use bank loans [31–33], commercial loans [34,35], leasing [36,37], as well as informal loans, most often family ones [38,39].

Financial energy, including the possibility of using external capital, often determine the investment activity of farmers [29,40]. Research on the use of external financing sources in agriculture emphasizes that difficulties in accessing outside capital result from both the characteristics of the potential borrower and the attitude of the lenders. Conditions for taking out and granting external capital (most often it is a bank loan) are related to the specificity of the functioning of farms, which is expressed in high capital intensity in relation to the sales level and the guaranteed cash surplus; lack of flexibility of owned assets and their strict connection with the farm; long production cycles and difficulties in raising capital on the stock market [41]. Moreover, agricultural holdings exhibit features that cause internal credit limitations of these units. These include farmers' conservative attitude to external, returnable sources of financing; lack of sufficient knowledge, skills and experience of farmers in using external financing and perceiving institutions granting loans as unfriendly. Farmers also have a fear of indebtedness, resulting from the fact that the purpose of the operation of many units in the agricultural sector is sustainable existence that allows them to meet basic needs, and not maximizing profit or increasing the value of the farm [42].

The literature emphasizes that access to credit and its use in agriculture contribute to the maintenance of food security, rural development, and affect the production volume and increase productivity, and, consequently, determine the level of agricultural income, contributing to poverty reduction [43–47]. Farms with greater financial possibilities also make greater investment expenditures, which contributes to an increase in labor productivity and in land productivity [48].

Among the studies on the factors influencing the use of external capital, the importance of both the characteristics of a farm and the personal characteristics of the person managing it is emphasized. Zulfiqar et al. [46] verified the impact of factors belonging to both of these groups on credit availability. They showed that the factors conditioning access to credit related to the farm manager are: the farmer's age, education and the fact of having income from outside agriculture, while the characteristics of the farm include: the size of the entity and the level of mechanization. M ˛adra [49] included the following factors influencing the amount of debt per hectare of agricultural land: the degree of financial leverage, change in the value of equity, inventory turnover, share of net working capital in total assets and the ratio of the ability to generate cash flows from operating activities. In turn, the studies by Kiplimo et al. [50] shows that farmers' decisions regarding the use of external capital are determined by the following factors: education level, occupation, access to extension services, total annual household income and the distance to the credit source. The first three factors had a positive impact on the access of the surveyed farmers to external sources of financing, while the last two factors had a negative impact. Datta et al. [51], conducting research in this area, proved that principal occupation, use of modern technology, the rate of interest, household medical expenditure and source of loan are significant variables affecting the debt.

The research also shows that a barrier to changing the structure of farm liabilities is the belief that equity is a cheap and safe source of financing [52]. The size of a farm, measured by its area or the value of its production, has a positive effect on the use of external financing sources and the level of debt of a farm [53–58]. Having a larger farm gives the opportunity to achieve a higher production value, which increases income. Therefore, it allows both to incur greater investment expenditures from own sources, and to supplement them with outside capital, because it increases creditworthiness, and thus financial energy.

The factor that influences the economic situation of farms, including the production potential and the structure of financing sources, is the specialization of agricultural production. The research results show that farms that focus on plant or animal production use external capital to a greater extent to finance their activities [59,60].

There are also dependencies between farmers' access to outside capital and the share of non-agricultural income in total farm income. Higher revenues from outside the farm may increase access to credit, which results, among others, from an increase in creditworthiness. This is particularly important in the case of young farmers, therefore age, combined with an increased share of income from non-agricultural activities, has a positive effect on access to external capital and, consequently, also on the increase in farm size, the ability to create economic surplus and productivity of production factors [61]. Wu et al. [62] also draw attention to the fact that incomes from outside the farm can contribute to an increase in creditworthiness and reduce the probability of default. On the other hand, they can be a source of internal financing, thus contributing to reducing the demand for external sources, as proved, among others, by Datta et al. [51].

Apart from the features relating to the farm, the socio-demographic features of the farm manager are of significant importance for the tendency to indebtedness. The age, gender, education, professional status of a farmer and their experience are important in making decisions about the use of outside capital in financing agricultural activities [53,55,58,63,64]. The results of studies on the influence of age on the propensity to incur debt are not clear; however, most of them prove that the farmer's propensity to use outside capital decreases with age [53,65]. Subash and Ali [64] have shown that the incidence of indebtedness increases with age, but after attaining a certain age, the relationship between age and indebtedness becomes inverse. The older a farmer is, the less inclined they are to make innovative investments, which affects credit constraints. Credit institutions are more willing to grant loans to young farmers [66,67]. It was also found that male-run farms used loans more often [63,64].

The level of education is a determinant of human capital, which is important in independent business management [68]. A higher level of education, as shown by research results, is conducive to the use of external capital [50,55,58], thus contributing to the increase of the financial energy of the agricultural holding. The level of economic knowledge of the decision-making entity in the selection of financing sources is also important. This is related, among others, to financial literacy and financial capabilities of a given entity and their use in the process of making decisions regarding the selection and use of individual financial products and services [69]. Educated people more consciously use the opportunities provided by the financial market; they understand the mechanisms of modern economy to a greater extent, including the role of the credit market, and they want to use it [70]. The condition for making a correct loan decision is, first of all, access to relevant information and having financial knowledge and skills that allow this information to be properly used [71]. In addition, credit institutions may have greater confidence in farmers with higher education due to their greater potential to work in the non-agricultural sector, should the need arise, which will contribute to obtaining additional income to pay off debt [65].

Having a successor who will take over the farm in the future, encourages farmers to increase investment expenditures, which was proved by Wright and Brown [72]. It is related to the expectations of the continuation of agricultural activity, especially for family farms. Thus, this fact should positively influence the tendency to incur debt in order to obtain capital for additional investments. The lack of a successor is one of the barriers to the modernization of agriculture [73]. Harris et al. [74] proved that farms with succession plans have higher profit margins and higher returns to equity, therefore succession planning is positively related to farm business performance. At the same time, it was found that farms which increase financial energy through the use of external capital to finance agricultural activity have higher production and economic results [14].

The rest of the paper is structured as follows. Section 2 presents the survey methodology and data sources. Section 3 presents the results of empirical research. First, the characteristics of the researched farms were established (Section 3.1). Then, the identification of farm characteristics and socio-demographic characteristics of the farm manager were made, which affect the propensity to use outside capital in financing agricultural production, as a form of improving the financial energy of a farm (Section 3.2). For this purpose, a logistic regression model and a classification-regression tree analysis (CRT) were used. The last section summarizes the obtained results and sets out the directions for further research.
