There are a number of different financing options available for farmers and ranchers who are new to the agricultural industry. Farm Service Agency (FSA) loans are the most common financing option for new farmers. However, there are other lenders that provide farm loans such as Farm Credit Services, local banks, and seller financing.
How Farm Loans Work
Farm loans work just like any other term loan such as personal auto loans, or home mortgages. You begin by locating a lender, completing an application, and submitting it to the lender for consideration. If approved, the lender issues you the loan. After the loan has been issued, you make monthly payments of principal and interest to the lender until the loan is paid in full.
Who Farm Loans Are Right For
Beginner ranchers and farmers who want to purchase a farm, livestock, or equipment will find that farm loans are well suited to their financing needs. Farm loans can finance most general operating expenses that a farmer might encounter during normal business practices.
Farm loans are right for:
- Those looking to purchase a farm: Beginning farmers and ranchers purchasing real estate to begin their business can use farm loans for financing.
- New farmers needing capital to purchase livestock: Farm loans can be used to purchase livestock, feed, or seed to get your operations started.
- Ranchers and farmers needing to purchase equipment: Most farmers need equipment to tend their crops and livestock. Farm loans can be used for equipment financing.
Farm loans can provide farmers working capital to maintain day-to-day operations as they build their businesses. Thankfully, the importance of farms is well noted, and many agricultural lenders have initiatives specific to providing loans to new farmers.
Where to Get Rancher and Farm Loans
Farm loans are available from a number of different types of lenders. There are lenders that specialize in financing agricultural operations, agencies focused on aiding farmers—like the Farm Service Agency (FSA)—local banks, and private financing through those selling to you. The type of lender that will be best for you depends on the type of financing you need.
Some sources of farm loans include:
1. FSA Loans
The Farm Service Agency (FSA) has an initiative to support beginning farmers and ranchers. There are a variety of different FSA loans available to help you finance your farm needs. The FSA offers direct financing through its Farm Operating Loans and Farm Ownership Loans, as well as guaranteeing loans funded by traditional lenders.
To apply for an FSA Loan, you can download the application from the FSA website, or visit your local Farm Service Agency office to meet with a loan specialist. If you have questions about the program, or the application process, the FSA provides technical assistance for all aspects of the process upon request.
2. Farm Credit System Lender
The Farm Credit System is a nationwide network of cooperative lenders focused on providing financing to farmers, ranchers, and agricultural producers. In addition to providing financing to new farmers and ranchers, lenders in this network also provide training and other educational resources to help you cultivate your farm business.
Farm Credit System Lenders operate regionally. To locate a lender in your area, you can use the Farm Credit System Lender Locator on the Farm Credit Administration’s website.
3. Private Contracts
When buying an existing farm, it is sometimes possible to forego third-party financing. Property owners may be willing to contract directly with a beginning farmer for sale of land, machinery, livestock, or other assets. These owner financing contracts can range from cash deals, to private mortgages, to working arrangements in which your labor pays for part or all of the property.
4. Aggie Bonds
Aggie Bonds are a federal and state collaboration that allows lenders to make loans to beginner farmers and ranchers without the lender being required to pay tax on the interest it collects. Because of this tax-exempt status, lenders are able to offer loans at lower interest rates. Aggie Bond loans are available in amounts up to $250,000.
Only 16 states currently participate in the Aggie Bond program. Those states are Arkansas, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, Oklahoma, Pennsylvania, South Dakota, and Wisconsin. If you are interested in applying for a loan through the Aggie Bond program contact your state agriculture department for a list of local participating lenders.
5. Local Banks
Beginning farmers and ranchers with excellent credit, an outside source of income, and farm experience may be able to obtain financing directly from a bank. If you need financing to purchase the property, and it will serve as your primary residence as well, a traditional real estate mortgage may meet your needs.
Where to Get Local Bank Financing
If you already have an established banking relationship with a local bank or credit union you can contact the lender directly to find out what financing options may be available to you. The lender will require you to submit a loan application which can either be obtained directly at your local bank, or often can be completed online and submitted electronically.
Farm Loan Costs
There are various costs associated with farm loans, but not all costs apply to all loans. For all farm loans, you will pay interest on the amount borrowed. Interest rates generally range from 1% to 8% depending on loan type. Additionally, most lenders will charge you a credit report fee, which varies based on the structure of your business.
Typical costs associated with farm loans are:
- Interest rate: Interest rates on farm loans typically range from 1% to 8% per year
- Closing costs: Closing costs vary based on the loan type, the amount of the loan, and collateral used to secure the loan. Some fees included in closing costs include recording fees, attorney fees, and related legal fees.
- Credit report fees: Credit report fees vary by business structure and by the number of principal applicants, but generally range from $15 to $100.
- Guarantee fees: FSA Guaranteed Loans have a guarantee fee equal to 1.5% of the loan amount.
While these are the fees that you may encounter with any farm loan, not all fees apply to all loans. For example, loan guarantee fees only apply to the FSA’s Guaranteed Farm Loan program, and not all loans will have additional closing costs involved.
Some loans—especially those involving the transfer of real estate—will have additional closing costs, but these can generally be rolled into the loan amount and don’t require additional funds from the borrower before closing. With guaranteed FSA loans, there will also be a loan guarantee fee equal to 1.5% of the loan amount.
Tips to Strengthen Your Farm Loan Application
Before you jump into a new farm operation and begin applying for financing, there are some aspects of your plan that you should pay attention to. Being cognizant of various aspects of your intended farm before applying for financing can help strengthen your loan application, as you will be able to answer many of the questions lenders are bound to ask.
Four things you can do to strengthen your farm loan application are:
1. Set Your Goals
Whether you’re starting a hobby farm or plan to make your farm into your primary source of income, it’s important to know what your goals are. Being aware of your goals can help you determine not only the size of your farm, but also the amount of capital you may need to put your plan into action. Additionally, lenders will want to know how you plan to reach these goals, one of the best ways to document this if through a business plan.
2. Know Your Starting Size
What size farm do you need to meet your goals? Knowing the answer to this question can help you determine where to begin. If you purchase a farm that is too small, you’ll find that your operations outgrow the farm quickly, meaning you’ll need to acquire additional facilities. Starting with a farm that is too large for your needs can lead to additional expenses for maintenance.
3. Decide Your Focus
Will you focus on one crop, or many? Most small farms start out producing only one or two crops. This allows you to focus on the growing requirements for those crops rather than juggling the various needs of multiple crops and customers.
4. Determine the Demand for Your Crop
Most lenders will want to see your plans for marketing and selling your product. Many farmers are able to survey their local market to determine the demand for the crop they are producing. Begin establishing your customer base, and developing your sales projections to include with your loan application.
Pros & Cons of Farm Loans
Farm loans offer lower interest rates and longer repayment terms than other small business loans. Additionally, because agricultural lenders advocate for beginner farmers, they often offer additional educational resources. However, to take advantage of farm loans you will need to have some experience farming, and sufficient collateral to back the loan.
Pros of Farm Loans
Some advantages of farm loans include:
- Many lenders offer educational resources: Many lenders, like Farm Credit Services and the U.S. Department of Agriculture offer educational resources for beginning farmers and ranchers.
- Lower interest rates: Interest rates on farm loans are generally lower than interest rates on other forms of business loans.
- Longer repayment terms: Farm loans offer longer repayment terms than other forms of small business financing.
Cons of Farm Loans
Some disadvantages of farm loans include:
- You need farm experience: Even as a beginning farmer and rancher, most lenders will require that you have prior farm experience before providing financing.
- You need sufficient collateral: In general, lenders are going to want to ensure that the loan they are making is 100% backed by collateral. As a new farm, this may be difficult.
- Longer repayment terms may mean a higher cost of capital: While the longer repayment terms offered by the FSA allow for lower monthly payments, you are paying interest over a longer time period. This may result in a higher overall cost of capital.
Alternative Financing for Your Farm
While farm loans are a great low cost financing option for most beginning farmers, they may not work for all farm businesses. If your new farm operation is not a family farm, or the purpose of your loan does not align with the eligible loan purposes of traditional farm loans, you may want to consider an alternative. Some common alternatives to FSA loans include SBA loans, USDA loans, and equipment financing.
Alternatives to FSA loans and other farm loans include:
For beginning farmers seeking financing to purchase equipment, equipment financing may be a good alternative. Equipment financing uses the equipment you already own or the equipment you are purchasing as collateral for financing. Much like a personal auto loan, the business equipment protects the lender; and in the event you default on the loan, the lender can take possession of the equipment in lieu of repayment on the remaining debt.
SBA 7(a) Loans
If your farm business does not meet the traditional farm definition, the Small Business Administration (SBA) 7(a) loan program offers guaranteed loans to small businesses in amounts up to $5 million. Repayment terms on these loans can extend up to 10 years (25 years for real estate).
SBA 7(a) loans can be used for working capital to purchase inventory and supplies, to finance fixtures and equipment, or to purchase real estate. SBA loans provide a low cost source of capital to business; however; they can be difficult to qualify for.
USDA Business & Industry Loans
USDA Business and Industry (B&I) Loans are offered as guaranteed loans. The maximum loan guarantee amount is $10 million. Repayment terms can extend up to seven years (30 years for real estate). Funds can be used for modernization and development of an existing business, purchase of real estate/equipment, refinance existing debt, or acquisition that will preserve jobs.
Farm Loans Frequently Asked Questions (FAQs)
A lot of information has been covered about FSA loans and other farm loans for beginning farmers and ranchers, including what they are, the different types of farm loans, and how to increase your chances of having a successful application.
Some frequently asked questions related to farm loans include:
How do I qualify for a farm loan?
The exact qualifications you need to meet to be eligible for a farm loan vary by lender and by loan type. In general, you will need to have stable credit history showing that you pay your debt obligations on time, some farming experience, and income and sales projections for your farm.
What is a farm loan mortgage?
A farm loan mortgage is a loan secured using farm real estate as collateral. The mortgage is the legal document recorded in the land records indicating that the property has been used as collateral. The mortgage document will be discharged from the land records when the debt has been paid in full.
How much do you have to put down on a farm loan?
With an FSA loan, there is no down payment requirement. The FSA will finance up to 100% of the value of the property. Additionally, if you are a beginning farmer or rancher, and are using another means of financing, you can apply for an FSA loan to cover the down payment requirement of the other lender.
As a beginning farmer or rancher, you may be unsure of where to go to apply for financing for your new farm. Fortunately, there are agencies and lenders that focus on providing financing to those that are just entering the farming industry. Loans through the FSA or from a Farm Credit System lender will likely be the best fit for your financing needs.