A Guide to Agriculture Loans and How You Can Use Them
The world would be nowhere without farming. It has been a way to sustain families, villages, and the entire world for thousands of years, and it shows no sign of stopping. In fact, in a press release on January 19, 2018, the United States Department of Agriculture announced that 2017 was a near-record year for farm loans with nearly $6 billion in new credit accessed. Of more than 120,000 loans, more than 25,000 went to new or underserved farmers. Whether you are just starting your journey into agriculture or you are a seasoned professional, it is important to understand how agricultural loans work and what they can do for farmers and ranchers.
Basic Loan Information
Like most types of loans, agriculture loans are available as three main types: short-term loans, immediate-term loans, and long-term loans. Short-term loans are best for people who do not need large amounts of money to complete projects but would still like to upgrade or otherwise improve their farm. Short-term loans are often available as revolving or non-revolving lines of credit. A revolving line of credit means that the person can use the money again as soon as he or she pays it back. A non-revolving line of credit is a single disbursement is not reusable upon payment.
Immediate-term loans are best used for assets that depreciate over time. Common agricultural examples include equipment, livestock, or machinery. They might also be useful for restructuring balance sheets to create more working capital. These loans typically have repayment times between one and 10 years. Long-term loans are sometimes referred to as contract financing and typically include real estate mortgages and other loans with repayment terms of 10 years or longer. These loans are best for purchasing, building or renovating housing, barns, and other important farming structures.
Common Types of Agriculture Loans
According to the USDA’s Farm Service Agency, there are four common types of farm loans: direct operating loans, microloans, direct farm ownership loans, and guaranteed loans. Direct operating loans allow the borrower to purchase livestock and farm equipment, purchase insurance, pay for family living expenses, and more. People who grow specialty crops or other or who own other types of non-traditional farms can use microloans. These loans, which require less paperwork and are easier to qualify for, are also good for small farms or new farmers.
Direct farm ownership loans are best for people who want to purchase large amounts of new land or to enlarge their current farms. They are also beneficial for constructing new buildings or protecting and conserving soil and water. Finally, guaranteed loans are best for family-owned and -operated farms that do not qualify for commercial farm loans. These loans make it possible to finance smaller operations but may also come with more service fees.
Other Types of Agriculture Loans
Many lenders simplify their loans even further by referring to them as operating, equipment, livestock, or agriculture real estate loans. Operating loans are for people who need money to produce and harvest crops, purchase feed for livestock, pay taxes, or take care of other agricultural expenses. Borrowers receive budgeted loan disbursements in a revolving line of credit. Equipment loans allow borrowers to purchase new machinery and other farm equipment and typically carry terms of three to seven years.
Borrowers who wish to purchase new livestock can do so with livestock loans, which often have repayment terms of up to seven years. Agriculture real estate loans are one f the most popular and may allow financing for up to 30 years. In addition to purchasing new real estate, borrowers can construct new facilities or make improvements to irrigation projects. These loans are also useful for refinancing and consolidation of debt.
Some farmers may find themselves in dire straits in situations such as drought, flooding, or other natural disasters. In these situations, farm owners may want to look into emergency loans. These loans can help with loss recovery that goes above and beyond what an insurance policy might pay out.
Targeted Agriculture Loans
Because farming is so important for survival, many lenders provide specialized loans that offer benefits for young people, minorities, women, and those who are just starting out in the industry. Youth loans are for young adults participating in Future Farmers of America, 4-H, or in similar organizations. The money is useful for purchasing livestock or financing educational pursuits. Minorities, women, and beginner farmers and ranchers typically follow the same guidelines as other, more experienced farmers. For the purpose of lending, a beginner farmer is considered someone who has owned his or her farm for less than 10 years.
Who the Loans Benefit
Agriculture loans benefit a wide variety of people and farm types. In addition to traditional farms, minority- or women-owned farms, and youth loans, the loans may be useful for urban farmers who grow crops on rooftops in places where traditional farming methods aren’t possible. The loans are also beneficial for family farms that want to strengthen their land, livestock, and crops against big agriculture in the area. Finally, agriculture loans also help people who own alternative farming operations, such as vertical farmers, hydroponics, or freight container farmers.
Tips for Choosing and Being Approved for a Loan
When it comes to choosing a lender and being approved for a loan, farmers must be diligent. When choosing a lender, it is important not only to talk with the financial institution but to verify license information, ensure the company has a good reputation in the lending community, and speak to current and former borrowers to see if they would recommend the company themselves.
After choosing a reputable company such as Western AgCredit, chances of approval can increase if the prospective borrower has a strong financial plan and provides the correct documents, such as deeds, tax forms, or other financial documents, upfront. Regardless of the lender or type of loan a borrower chooses, he or she must be sure to read the terms and conditions before signing on the dotted line. Verify interest rates, service fees, and other repayment information and ask questions if necessary.
When properly cared for and funded, a farm can sustain life for people and animals for miles around. It is certainly a worthy financial investment, especially with a strong lender in your corner. Just ask any of the thousands of people who borrowed to sustain their own farms last year.