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July 05, 2022

Farm Loans: How to Invest in Your Farm

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FF

Fora Financial

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So, which farm loans are suitable for your small business's financial needs? It all depends on your financial history, needs, and preferences. Fortunately, you may qualify for farm loan programs, even if you own a newer business or don’t have the best credit score. In this post, we'll cover everything you need to know about pursuing farm operating loans.

What is a Farm Loan?

Farm loans or agriculture loans are designed to help you purchase, operate, or expand a farm. These loans can come from private lenders or government organizations, like the USDA or SBA. Each farm loan comes with its own eligibility criteria, rates, terms, and benefits. That’s why shopping around and comparing all your options is essential. Whether you need to finance operating expenses, need extra cash during the off-season, or want to invest in equipment, like tractors and irrigation systems, farm ownership loans can come in handy.

Types of Farm Loans

While there is no shortage of farm loans available, the most common options include the following:

USDA Farm Loans

The U.S. The Department of Agriculture Farm Service Agency (FSA) offers a variety of loan programs specifically designed for farmers and ranchers. Some of these loans are direct loans from the USDA itself, and other loans are made by third-party lenders and guaranteed by the department. There are also guaranteed loans to farm businesses in rural areas. The most noteworthy perks of USDA farm loans are low down payment requirements and interest rates. Depending on what you’ll use the financing for, terms can range from 10 to 40 years, and down payments may be as low as 5%.

SBA Loans

Backed by the Small Business Administration, SBA loans can guarantee anywhere from 50% to 90% of the loan amount, up to $5 million. While many SBA loan programs are available to farmers, the 7(a) loan is the most popular. You can use it to pay for startup costs, inventory, equipment, expansion, or other business expenses. Compared to traditional loans from private lenders, SBA loans require a stronger financial profile, which includes good credit, sufficient revenue, and more documentation. The benefits to SBA loans, however, are low-interest rates, favorable terms, and access to resources like mentorship programs and entrepreneurial development services.

Term Loans

Banks and alternative lenders usually offer term loans. If you take out a term loan, you’ll receive a lump sum of money upfront. You’ll repay what you borrow over time via fixed monthly payments over an agreed-upon term. While term loans can be challenging to qualify for, these products usually offer low rates.

Lines of Credit

Lines of credit offer a flexible form of financing; you can borrow as much or as little as you’d like up to a set credit limit, which will be based on factors like your credit score and annual revenue. A line of credit can be the ultimate financial solution if you struggle with cash flow issues during seasonal fluctuations. It may also make sense to pursue a credit line if you don’t know exactly how much money you require.

Equipment Loans

There’s a good chance your farm or ranch depends on costly equipment to succeed, such as:
  • Plows
  • Trailers
  • Seeders
  • Balers
  • Fertilizer spreaders
An equipment loan can help you find the cost of this equipment. Since the loan will be tied to the equipment itself and a lender can seize it if you default on your payments, it’s relatively easy to get.

How to Choose the Right Farm Loan

Not all farm loans are created equal; there are noteworthy differences between them. When shopping for a farm loan, consider these factors to help you make the most informed decision.

Creditworthiness

In a perfect world, you’d get approved for any farm loan that you'd like to pursue as soon as you applied. The reality is that some loans, like USDA loans and SBA loans, come with strict eligibility requirements. Look at your personal and business credit to determine which financing solutions are the most realistic for your business.

Loan Use

Ask yourself what you’ll use the proceeds to determine the best funding option. An equipment loan makes the most sense if you want to fund equipment. On the other hand, if your goal is to cover payroll, marketing, or working capital, you may be better off applying for a term loan or line of credit.

Loan Timing

Sometimes, you may require money for your business immediately, while other times, you can wait weeks or even months for it. USDA and SBA loans might be a good fit if your financing needs aren’t urgent. If you don’t have time to go through a lengthy application and approval process, you might want to pursue a business credit card or line of credit from an online lender.

Collateral 

If you have no credit or bad credit, a secured loan linked to collateral or an asset you own can help you get approved for more money. Determine if you have collateral you’re willing to risk to land a larger loan amount. Also, remember that the business lender will seize your collateral if you default on your loan.

Conclusion: Steer Your Farm Toward Success with a Farm Loan

Farm loans are valuable financial tools, especially if you choose the right ones and pay them back on time. Whether you own a startup or an established farm, you owe it to yourself to explore the various loans and choose the best options for your specific goals.