If you just inherited some land and want to start an agricultural business, you need to be prepared for some challenges. Being a farmer in 2023 is very hard, and you will likely have to borrow money to purchase the necessary equipment just to be competitive in the market.
What’s even more troublesome is that certain institutions are reluctant to give agricultural loans, even if they specialize in such products. Instead, they might offer a personal loan that has a much higher interest rate. Naturally, it’s not a piece of cake to get funding to launch a farm. Despite your best intentions, the unpredictable nature of some product markets can make investing difficult. This is because farming is a noble occupation that requires integrity and perseverance, yet one that pays well.
Now, however, I’d like to return to the topic of currency. Farm financing is used to pay for things like large machinery, animals, and technical updates that are necessary to run a farm. We’ll go through some of the most common farm business loan options so you can make a well-informed decision about how to finance your enterprise. Although the bank will rub their hands, the loan can put your business in danger from the onset.
Getting the right loan can make a difference between a successful and unsuccessful agricultural business. A general rule of thumb is to avoid any loans or investments that are worth 50% of the property value.
You need to analyze the loan structure before making any decision. For example, if you’re looking to get something like a reverse mortgage, make sure to calculate everything in advance with a reverse mortgage calculator (visit this link for more info https://reverse.mortgage/calculator).
Do you actually need financial help?
Running a farm is an arduous, costly affair. Still, a lot of entrepreneurs are reluctant to take a loan as they don’t want to burden their business from the get-go. Always remember that financial programs and loans are there to help scale your business so that the company can progress faster through its natural cycle. So, even though a loan might hurt in the short run, it will be crucial for the long-term development of your business.
You can use these financial instruments for just about anything, including:
- Purchasing new equipment
- Buying tools, fertilizers, seeds, and other supplies
- Refinancing other loans
- Starting or enhancing marketing campaigns
- Covering operating costs
- Fixing your farm after natural disasters
- Purchasing more land
- Introducing new, more efficient systems
What Does the Lenders Look For?
For a better understanding of the lender’s perspective, you can try to visualize their decision to grant or deny your application for a loan for your farming business.
To tell you the truth, banks like to lend money to the most creditworthy clients they can locate. Their job description includes chasing down borrowers for overdue interest payments on borrowed funds. They have to be picky about who they lend to because of the costs associated with loan default.
Therefore, it is crucial to monitor one’s credit score regularly: It proves that you have a history of handling debt responsibly, whether that debt is on a credit card for your business or a farm loan.
Many lenders have minimum income or time in company conditions, making it difficult to obtain farm financing to help you recover from a bad year or start a farm from scratch. Knowing your credit score is essential when applying for a business loan, but you should also keep these points in mind.
4 Best programs and loans for farmers
If you’re running a small farm and don’t know who to turn to, you should definitely consider these programs and lenders.
1. Beginning Farmers and Ranchers Loans (Farm Service Agency)
To apply for a loan from Farm Service Agency, you need to fulfill certain requirements:
- An entrepreneur has been in the agricultural business for less than ten years.
- Heavily participates in the program with their own funds.
- Meets the general loan eligibility requirements.
- If you’re looking for a direct farm ownership loan, you have to be in the business for three years or more. Furthermore, your farm should be 30% or smaller compared to an average farm within a county.
2. Microloan Programs (Farm Service Agency)
Aside from the loan for beginner farmers, Farm Service Agency also provides micro-loans for up to $50,000 (there isn’t a minimal amount on the loan). Getting this type of loan is much easier compared to the previous entry on the list. Furthermore, these loans have low interest, and the whole procedure is much shorter.
Here are the main criteria you have to meet:
- If you’re an existing farm that has been in the business for a while, you will have to provide a 3-year record showcasing the production capacity and financial state of the farm. The financial data should include current farm assets and outstanding loans.
- You have to provide a detailed financial plan that demonstrates your ability to pay off the loan.
Most farmers take this type of loan to cover the initial business expenses. However, you can also use it to buy new vehicles and machinery, increase marketing investments, improve systems, etc. The important thing to note about microloans is that you have to repay them within seven years regardless of the amount of money you took.
3. Agricultural loans from financial institutions
The majority of financial institutions in the US have separate departments that tackle business loans. Only a select few have departments that work exclusively with agricultural entities. Before applying for a loan in your local bank, make sure they specialize in this kind of instrument.
As an agricultural business, it is very important to have a guarantee from Farm Service Agency. Alternatively, you should get a guarantee from Small Business Administration to simplify the process. Some of the more notable agricultural lenders in the US are Farm Credit, M&T, Community Bank, and Bank of the Finger Lakes.
4. Various other micro-business loans
In some counties, entrepreneurs have access to micro-business loans with very low-interest rates. As if that wasn’t enough, these loans have great repayment terms providing lots of financial flexibility to your business. Make sure to contact the economic department in your local county to inquire about these loans.