Published on July 22nd, 2023
Farm loans are also known as agricultural loans. They are a type of financial assistance for farmers and other agricultural businesses. However, since they are loans, it is money that is expected to be paid back.
An agricultural loan has many useful benefits for farmers. It may be used for various farming business operations such as purchasing land, equipment, seeds, livestock, fertilizers, marketing, expenses, business expansion, etc.
There are many places from which a person may source a loan. Some places include; banks, credit unions, agricultural cooperatives, and government agencies.
Each lender has specific terms and conditions for these loans that vary. Farmers should therefore choose their lenders based on their specific needs.
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Types Of Farm Loans
There are several types of loans that can meet the various needs of different farmers and agricultural businesses.
- Operating Loans: These loans cover day-to-day farming expenses, such as buying seeds, fertilizers, pesticides, fuel, labor, and other operational expenses.
- Equipment Loans: These are loans that farmers take out when purchasing new equipment, such as tractors, harvesters, etc. They may also be used for repairs and upgrades of equipment.
- Land Purchase Loans: These are loans that farmers take when they need to purchase agricultural land or expand their agricultural business operations.
- Livestock Loans: When farmers need money to improve their livestock farming. It may be used to purchase animals, improve facilities, or deal with livestock-related expenses.
- Farm Real Estate Loans: These loans can help farmers purchase or improve their agricultural real estate, such as farms, ranches, or vineyards.
Farm loans are governed by terms and conditions within the agricultural sector.
These conditions will include loan aspects such as repayment period, borrowed amount, interest rates, collateral requirements, etc. When farmers take farm loans, they should be prepared to meet the specific lender requirements.
Special Agricultural Loan Programs
Farm loaning programs exist to help farmers grow their businesses and, in turn, result in steady growth within the agricultural sector.
Government agencies and other agricultural development organizations generally offer loans at favorable terms and conditions.
For instance, the U.S. Department of Agriculture (USDA) offers several loan programs, including the Farm Service Agency (FSA) loans, to farmers and ranchers.
Unfortunately, many times, farmers and agricultural business owners have failed to benefit from the loans due to discrimination.
The farm loan discrimination has led to many lawsuits through which many farmers have received compensation.
There are some common features that agricultural loan programs typically include:
Lower Interest Rates: Farm loans generally have much lower rates than regular commercial loans. The agricultural sector often faces various risks, including weather, so the lower rates are to make credit affordable to farmers so that they can better deal with them.
Flexible Repayment Terms: Many commercial loans aren’t very flexible. However, special farm loan programs provide farmers with flexible repayment options. Some of the options are designed to align with the seasonal nature of the sector’s farming and crop cycles. Farmers may sometimes have the option to make payments after generating income from their crops or livestock.
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Longer Repayment Periods: Special farm loan programs offer borrowers longer repayment periods that allow farmers ample time to make money and repay any borrowed money in due time. The option considers the uncertainties and challenges a farmer may face within the agricultural sector.
Reduced Collateral Requirements: A farmer must provide collateral to get a loan. Special farm loan programs may make it easier for farmers to acquire loans by requiring less collateral. They may also affect more unconventional assets such as crops, livestock, or machinery as collateral.
Targeted Loan Types: There are many types of loans, and special agricultural loan programs might offer a wide range of specific loan types meant to meet the needs of the borrowers. Some of these loan types include; operating, equipment, land purchase, and livestock loans.
Support For New And Young Farmers: These are loaning programs that offer financial aid to new and young farmers venturing into the agricultural industry.
Technical Assistance And Training: Besides financial aid, some special loan programs provide technical assistance, training, and educational resources to help farmers improve their agricultural practices, increase productivity and grow their businesses.
Farm Loan Interest Rates
The nature of loans is that they tend to accrue interest over time. Various factors will determine how much interest a farm loan interest accrues, such as the lender, the type of loan, the borrower’s credit score, the loan amount, etc. Essentially, there are two main types of interest rates.
Fixed Interest Rates
As the name suggests, these loans have a constant interest rate. The loan can be paid back in fixed-rate installments based on the borrower’s arrangement with the lender.
The advantage of fixed interest rates is that the borrower has stability since the payments do not change and can therefore plan and budget ahead of time.
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Variable Interest Rates
These are interest rates that will fluctuate and change during the loan term.
The rates change based on various factors in the market. Essentially, borrowers will pay back their loans in irregular amounts.
Borrowers have the advantage of having lower initial rates and potentially low rates throughout their loan term.
However, it can be challenging for businesses because it makes predicting future costs, planning, and budgeting difficult.
Factors That Influence Interest Rates For Farm Loans
Various factors influence interest rates for a farm loan. Some of these factors include;
- Economic conditions
- Central bank policies
- Creditworthiness of the borrower
- The loan amount and terms of borrowing
- Collateral
- Lender’s risk appetite
- Market competition
- Government programs
- Inflation expectations
Qualifying For A Farm Loan
Farmers and agricultural businesses can borrow from many types of lenders. However, not all lenders and loans are the same, meaning that what works for a specific lender may not work for another.
While requirements may vary, there are several factors that lenders generally consider.
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A Good Credit Score
A major factor in securing loans is the aspect of credit score. Most lenders only want to lend money to farmers with a high credit score.
However, some lenders also understand that a lot goes into forming the business and industry, which could result in a low credit score.
As a result, some lenders will assess the credit history of the farmer to assess their creditworthiness. A higher credit score ultimately gives a farmer better loaning terms and opportunities.
Business Plan
Every farm should have a business plan. It is a document that outlines the business’s goals, objectives, expenses, payment strategies, and financial projections.
Such a document shows how a farmer intends to use the borrowed money and that there is a clear plan to repay the same.
Business plans are a sign that a farmer has a clear vision for their business to succeed. As a result, lenders tend to take them seriously and are more likely to give them a loan.
Collateral
Farmers need to pledge an asset, such as land, livestock, equipment, etc., to show the lender that they intend to repay the loan.
The asset is also known as collateral and may be used to repay the loan if the farmer defaults.
Lenders will only loan out a percentage of the collateral, with the majority maxing out at 75%.
Farmers need to understand the specifics of loan to value ratio that a loan offers beforehand.
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Debt To Income Ratio
Farms, like other businesses, have expenses, liabilities, and debts. A lender would need to assess whether a farmer can keep up with loan repayments while paying for other expenses and debts.
Before issuing a loan, a lender would be keen on evaluating a farmer’s debt-to-income ratio.
The ratio is calculated by dividing the total liabilities by the total assets. The majority of lenders prefer a ratio that is less than 50%.
Purpose Of The Loan
While it may seem redundant, the purpose of the loan plays a crucial role in qualifying for the same.
There are many reasons for which farmers may require or want a loan, such as buying land, purchasing equipment, farm expansion, operating costs, etc.
The purpose of the loan affects the terms and conditions of the same. Clearly stating the purpose of the loan and how money is intended to operate will help a farmer qualify for a loan.
Experience
Years of farming experience are as important as a high credit score and collateral to a lender.
Expertise plays a crucial role in future business plans and financial projections.
When a farmer needs a loan, especially after a few rough seasons, a good track record and expertise in the field give a farmer a higher chance of qualifying for a loan.
A farm loan has numerous benefits. There are many types of loans from which farmers may choose from.
A former should consider factors such as interest rates, their financial state and their ability to repay the loan before applying for one.
It is essential for a borrower to self analyse to determine whether they qualify for a loan or not.
