Types of Loans
Borrowing needs will dictate the type of loan a beginning farmer will need. General categories of loans are: operating loans, capital loans, and long term farm purchase or real estate loans.
Operating Loans
Operating loans are typically tied to the farm’s production or operating cycle and are used to manage cash flow needs within that cycle. Operating loans may be used for normal operating expenses such as inputs needed to grow the current year’s crop and require repayment at the end of that cycle, typically within the year. It is common for operating loans to function as a revolving line of credit where funds are drawn when needed, and as principal is paid down, those funds again become available for the farmer to access.
Capital Loans
Capital loans or intermediate-term loans are used for the purchase of assets such as machinery and equipment or livestock. Repayment terms are tied to the useful life of the asset, commonly 5 to 7 years.
Real Estate/Farm Purchase Loans
Long term loans are used to purchase farms and other real estate, and have longer repayment terms, often from 20 to 30 years.
Types of Lenders
There are several types of lenders that provide agricultural financing, including the U.S. government, lenders within the Farm Credit System, commercial lenders, local banks and credit unions, equipment dealers, and cooperatives. In some circumstances, private financing is an option.
Specific loan types and terms will depend on the lender. Loans may only be used for the allowable purposes as determined by the lender and included in the loan agreement.
Beginning farmers should consider several lenders and compare loan terms, including allowable use of funds, repayment terms, interest rate, loan fees, and collateral requirements. Some lenders have specific programs for beginning farmers, which may include more favorable interest rates and loan fees.
USDA
The United States Department of Agriculture (USDA), through the Farm Service Agency (FSA), loans money to farmers, including beginning farmers. USDA loans fall into two primary categories: direct loans, where the government itself lends money to the farmer, and guaranteed loans, where another lender makes the loan, but USDA guarantees to repay the lender for most of the balance if the borrower defaults.
When FSA makes a direct loan, the borrower is in a lending relationship with the U.S. government. FSA loan officers review the loan applications, make loan decisions, and service the loans once they are made. Direct loans are made and serviced according to federal law and USDA regulations. Both the borrower and FSA have specific responsibilities under these rules. Borrowers also have certain rights defined in the regulations.
USDA categorizes as farm operating loans both traditional operating loans which can be used for normal operating purposes with an annual repayment, and also longer-term loans that may be used for machinery and equipment, certain improvements, and in some circumstances refinancing debt. Repayment terms vary depending upon the purpose of the loan, the loan applicant's ability to pay, and when income is projected to be available. General operating loans typically come due within 12 months since they are tied to annual production. For capital purchases such as equipment or livestock, loans may be amortized up to seven years.
USDA also provides farm ownership loans. Farm ownership loans are amortized over a term up to 40 years and can be used to purchase a farm or farmland, expand an existing farm, construct, purchase or improve farm buildings and dwellings, promote soil and water conservation, or purchase easements. FSA makes direct farm ownership loans, participates in joint financing arrangements with commercial lenders, and also guarantees loans with commercial lenders.
USDA loan amounts are capped by law. Direct operating loans that FSA makes to the farmer can be up to $400,000. FSA direct farm purchase loans are available up to a maximum of $600,000. FSA will guarantee loans up to $2,251,000.
Beginning Farmers
Each year, a percentage of FSA farm ownership and farm operating loan funds is targeted to beginning farmers. A beginning farmer for FSA loan purposes is one who has not operated a farm for more than 10 years and substantially participates in the farming operation. If the applicant is an entity, all members must be related by blood or marriage, and all entity members must be eligible beginning farmers.
FSA has a down payment program loan, to assist beginning farmers in purchasing a farm. The loan is limited to 45 percent of the least of: the purchase price of the farm OR the appraised value of the farm OR $667,000. Therefore, the maximum direct down payment loan a beginning farmer can receive is $300,150. The loan has a 20 years loan term and the interest rate is 4 percent below the direct farm ownership rate, but not lower than 1.5 percent. The downpayment can be used for a purchase that will be financed by a commercial lender or a private party.
FSA also has a program for land sale contracts and will provide a financial guarantee for purchases up to $500,000. There are two types of guarantees available to the seller under this program, a prompt payment guarantee and a standard guarantee. The prompt payment option guarantees up to the amount of three amortized annual installments plus the cost of any related real estate taxes and insurance. The standard guarantee, guarantees 90 percent of the outstanding principal balance under the land contract. The guarantee period is 10 years for either plan. The contract payments must be amortized for a minimum of 20 years.
Farm Credit
The Farm Credit System also provides credit to farmers, including beginning farmers. Often confused with USDA Farm Service Agency (FSA), farm credit associations are not part of the federal government. When a farmer borrows from FSA, they have a lending relationship with the U.S. government. When they borrow from a farm credit association, the lending relationship is with that farm credit association.
The Farm Credit System (FCS) is a nationwide network of farmer/borrower lending and financial institutions. Farmers, ranchers, and agricultural cooperatives borrow from their regional FCS association, and in return, they become members who may receive patronage dividends each year. FCS associations are regulated by the Farm Credit Administration.
Farm Credit associations are located throughout the United States typically by region. Association locations can be found on this map. Farm Credit Services of America works with farmers in Iowa, Nebraska, South Dakota and Wyoming.
Farm credit associations provide operating, capital, and real estate loans in addition to other loan products. Many offer leasing products as well.
Beginning Farmers
Each farm credit association has a beginning farmer program. A beginning farmer is defined as someone with 10 years or less of experience. Examples of programs include training and seminars on topics such as intergenerational transfer of family farms, risk management techniques, financial skills training, and establishing effective business plans.
Farm Credit of America’s Farmer Loans for Young & Beginning Ag Producers program provides information for borrowers in Iowa, Nebraska, South Dakota and Wyoming.
Commercial Lenders, Local Banks
Local banks and lenders also offer loans to farmers. Some lenders participate in USDA FSA loan guarantee programs. Loan offerings, terms, and conditions will vary by lender.
Resources
Farm Service Agency Farm Loan Programs
On its website, the Farm Service Agency (FSA) provides detailed information on its loan programs that can be used to start, expand or maintain a farm. Included it FSA's Loan Assistance Tool which can be used to learn about loan requirements and understand the application process.
Farm Service Agency Beginning Farmers and Ranchers Loans
This resource provides information specific to beginning farmer loan programs.
This resource provides information about the Farm Credit System and provides links to member associations by state.
Farm Credit Services of America
Farm Credit Services of America provides credit and other services to farmers, ranchers, agribusinesses and rural residents in Iowa, Nebraska, South Dakota and Wyoming.
How to Motivate Your Lender to Say, “Yes”
This article, created by Michigan State University, discusses the loan process and what the lender wants to see.