An agriculture loan can help cover many expenses. These include equipment purchases, sudden cash flow problems and support for your growth goals. To successfully apply for a loan, you must prepare and research to find the loan that suits your needs. Let’s explore the various farm loan options that align with your stage of farm growth.
Starting Strong: Beginning Farmer Loan
As a new farmer, you might face financial challenges. These include rising land prices, not enough capital, or lack of funds for a down payment. Whether you’re new to farming or taking over your family’s farm, there are many loan programs available.
The Beginning Farmer Loan Program (BFLP) through the Iowa Finance Authority (IFA) offers loans at reduced interest rates. Here are a few key features and benefits to help you determine if the BFLP is a viable option.
- The BFLP helps new farmers get land, buildings and equipment at reduced interest rates.
- Loan maximums:
- Land: $649,400
- Buildings: $250,000
- Equipment: $62,500
- BFLP offers interest rates 20%–25% lower than market rates.
- Loan terms are 20–25 years.
- For longer terms, FSA offers direct ownership loans for up to 40 years.
If you’re interested in the BFLP, you must meet these eligibility requirements:
- Be a resident of Iowa and 18 years of age at the time of application.
- Be the owner or operator.
- Have a net worth of no more than $833,000.
- Own no more than 30% of the county median acres.
- Have access to capital and equipment to run the farm.
- Have enough education, training or experience for anticipated farm operations.
Optimizing Operations: Operating Loans
Three loan types can help you grow or improve your farm: operating, livestock and equipment loans. Let’s take a closer look at each type.
An operating loan, also called an operating note, is a short-term loan. It helps finance daily operations for cash grain and livestock farmers. The main benefit of this loan is that it provides the cash flow you need to cover ongoing farm expenses. For example, grain farmers sell their crops right after the fall harvest. Then, they sell them one or two more times in the next year. Farm expenses occur all year. So, an operating loan bridges the gap between expenses and income.
Some of the items you might cover with an operating loan include:
- Seed, chemical and fertilizer purchases
- Livestock feed
- Veterinary care
- Payroll expenses for farmhands or seasonal workers
- Equipment repairs and fuel for the upcoming planting or harvesting season
- Family expenses
A key feature of an operating loan is that the amount you borrow is flexible. Your banker will look at the size of your farm, operation type and projected income to determine the loan amount. The interest will vary depending on the lender, your credit and the market.
Optimizing Operations: Livestock Loans
A short-term livestock loan to purchase animals and grow for slaughter is paid off within one production cycle. This type of livestock loan involves multiple advances. The initial advance covers the animal purchase. Additional advances are made throughout the growing period to cover feed, veterinary care, yardage and other expenses.
Additional features of a livestock loan:
- Lenders base the loan amount and repayment schedule on the animal's expected weight gain. They also consider its production cycle. For pigs, the loan term is around six months. For cattle, the term is between 9 and 11 months.
- After selling the animals, the farmer receives the income and makes repayment.
- A livestock loan for breeding stock has different terms and considerations; your ag banker will provide more information.
Optimizing Operations: Equipment Loans
As a farmer, you rely on the equipment you use. You might be making your first investment. Or, you might be replacing a piece of heavy equipment. In either case, you need to consider many factors when deciding whether a farm equipment loan is the best financing option.
Here are a few key facts to know:
- Loan amounts vary depending on the purchase price or value of the equipment.
- Down payments range from 10-30%.
- Terms are 3–5 years, with 5 years being the most common.
- You can spread payments over the loan term, choosing between annual or semi-annual intervals.
As you explore loan options, your banker will help you compare the cost of owning the new equipment to the value of equipment you want to trade in. They will also work with you to compare and contrast financing options based on your type of operation. For example, the equipment needed for a livestock farmer differs from that of a cash grain operation.
Expanding Horizons: Real Estate Construction Loan
As your farm grows and expands, you may need a real estate construction loan. You might be building a new grain bin, or you might be expanding your facilities for new or more livestock. This type of loan has the advantage of financing a permanent improvement that will increase the future value of your property.
What you need to know if you’re considering this type of loan:
- The down payment is higher than an equipment loan. It's typically around 20%.
- Loans range from 10 to 25 years based on the building type.
- Hog buildings finance for 15 years.
- Dairy barns can go up to 20 years.
- Machine sheds range 15 to 20 years.
Farm Service Agency (FSA) Guaranteed Loan
Your farm operation may need an FSA loan at any stage of growth. This agribusiness loan bridges the gap between what a farmer needs and what a lender is comfortable providing. An FSA loan benefits both parties. The farmer gets access to financing that might not be available while the lender faces less risk.
Here is what you need to know about this type of loan:
- Farmers apply for the loan through an agriculture lender approved by the FSA.
- The FSA guarantees a portion, up to 90%, of the loan amount to the lender.
- Borrowers can use FSA guaranteed loans for various purposes:
- Addressing carryover debt after selling crops and livestock.
- Financing operations during economic downturns affecting agriculture.
- Helping young farmers buy land by mitigating the risk to lenders.
FSA guaranteed loans are not the right fit for every situation. They should not be a replacement for responsible lending practices. The need for an FSA loan changes based on the health of the agricultural economy.
Make a Farm Loan Application Work for You
There is no question that there are many agriculture loan opportunities available. One of the first steps before starting the loan process is gathering these materials:
- Business plan with projections
- Annual revenue
- Bank statements
- Past three years of tax returns
- Legal documents
- Available collateral
Having a team of people you know and respect to serve as a sounding board is a huge asset for your business. Your ag banker is a great person to discuss ideas with; they will help you dig deeper into your finances, run the numbers and walk you through the best loan options.
If you are exploring financing options for your farm operation, reach out to one of our Ag Bankers today.
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