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 LoansWhile there is no shortage of farm loans available, the most common options include the following:
USDA Farm LoansThe 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 LoansBacked 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 LoansBanks 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 CreditLines 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 LoansThere’s a good chance your farm or ranch depends on costly equipment to succeed, such as:
- Fertilizer spreaders