Agricultural lending, or ag loans, are financing options for people in the farming industry. This funding option supports agricultural business operations like crop production, purchasing or refinancing capital assets, and buying or improving farm equipment and real estate.
Farming can be costly whether you’re just starting up or already established. This is why financing help is so critical. Modern farming, advanced equipment, and heavy-duty machinery can rack up costs quickly. Meanwhile, the unpredictable climate can damage crop yields.
Applying for agricultural loans could be vital in ensuring your farm has the funds necessary to run efficiently. This blog will give you an overview of what you want to know before applying for agricultural lending. Let’s get to it.
Table of Contents
Understanding the Need for Agricultural Lending
Key Features of Agricultural Loans
Factors to Consider Before Applying
Governmental and Institutional Support for Agricultural Lending
Training and Education Programs
Benefits of Agricultural Lending for Small and Large Farms
Diversifying Agricultural Activities
Understanding the Need for Agricultural Lending
Farmers and ranchers have historically struggled to secure agricultural financing as most banks see issuing farm loans to agricultural businesses as high-risk. This is because the profitability of an agribusiness can vary significantly depending on factors out of anyone’s control, like the weather, temperature fluctuations, and other mishaps, such as animals destroying crops.
There is indeed a significant risk in the farming business. Farmers must consider production risks, institutional hazards like government actions and tax laws, and personal liabilities like dealing with illness and injuries.
Luckily, there are several risk management tools to fall back on to ensure continuity and growth in the farming business, like agricultural lending. These loans are designed to help you stay afloat when facing challenges and help you grow when you identify an opportunity to expand or level up your business.
Types of Agricultural Loans
There isn’t a one-size-fits-all agricultural lending option out there. Instead, several different loan options are available depending on your needs and what you plan to use the funds for. In general, agricultural loans can be broken down into three different categories:
- Short-term
- Intermediate
- Long-term
#1 Short-Term Loans
Short-term loans are used for immediate, daily operating needs like seeds, fertilizers, insecticides, and labor. These loans are typically available as a budgeted or revolving line of credit with varying maturities, often somewhere from one to four years.
#2 Intermediate-Term Loans
Intermediate-term loans are for expenses bigger than the daily needs covered by short-term loans but are smaller and have shorter repayment periods than long-term lending. These loans can be used to fund machinery and other farm equipment, livestock, and farm facilities like new barns or silos.
#3 Long-Term Loans
Long-term agricultural loans are much bigger loans for purchases like land acquisition, refinancing farmland, or maintaining other necessary farming infrastructure. Long-term loans typically appear as fixed or variable-rate mortgage loans that can be tailored to your specific needs and cash flow.
Key Features of Agricultural Lending
All loans come with sets of rules and criteria that are important to heed to ensure you don’t lose the funding or hurt your chances of getting more financial assistance in the future. Not only that, but it’s essential to understand the loan you’re applying for ahead of time to know what you’re getting yourself into so you can be sure it’s the best option for you.
Some key features of agricultural lending to keep in mind are:
#1 Interest Rates
All loans come with interest rates, including those from agricultural lending. Rates are based on the financial background of your business, including risks like your credit score and the risk of the loan, competition, and the lender.
Agricultural loans will come with either a fixed or variable interest rate. Fixed interest rates are based on market conditions when taking out the loan and typically stay the same over time. Variable interest rates can change over time and fluctuate based on an index the lenders use to set their rates. This means the rate can increase or decrease over time, though some loans have caps that limit how much the interest rate can change.
#2 Loan Tenure
Loan tenure is the length of time the loan is repaid. The length of a loan can vary widely, generally from one to 40 years. For example, the United States Department of Agriculture’s (USDA) Direct Farm Ownership loan is a 40-year loan, whereas the Direct Farm Operating Loan is generally a 12-month loan.
#3 Collateral Requirements
Collateral is an asset that you pledge to a lender to secure a loan, like a house or car. This helps minimize risk for lenders because if you can’t repay your loan, the lender will seize the assets you put up as collateral as a form of payment. The type of assets that can be used as collateral may vary depending on the type of loan, but generally, you can use crops, livestock, farm equipment, and real estate to secure a loan.
#4 Grace Periods
A grace period is when the payment can be made without penalty after a loan’s due date. Flexibility in your repayment structure can be valuable, especially if you experience an unexpected obstacle hindering profits. The length of the grace period can vary depending on the loan and the lender. Sometimes, a grace period is about 15 days, but depending on the loan length, you may have a longer grace period, like six months.
Factors to Consider Before Applying
Like any loan, it’s not wise to jump into applying and securing funding without first having a solid game plan for the funds and making sure the loan won’t end up causing problems for your business’s financials later down the road.
If you’re considering applying for agricultural lending, some crucial factors must be considered first, including credit history, business plans, risk management procedures, and market research. Let’s zoom in.
#1 Credit History
When lenders review your loan application, your financial and credit history will undoubtedly be up for discussion. These factors help give lenders an idea of your ability to repay the loan.
This is why applying with a good credit score — typically 700 or better — and a strong credit history with few late payments, bankruptcies, or foreclosures is essential. To apply for agricultural lending, you must be at least four years out of bankruptcy or foreclosure.
#2 Business Plan
When applying for an agricultural loan, you must present a clear, robust business plan that details your intended use for the loan. Your business plan should cover your goals, strategies, financial projections, and information like your farm’s size and what crops and livestock you raise. This is another way for lenders to identify your farm’s risk and how risky it may be to provide you with a loan.
#3 Risk Management
To protect your business, it’s important to have some insurance and risk mitigation strategies in place. Along with financial leverage like agricultural lending, farmers can use other tools like crop yield insurance, which covers you in the case of crop losses or crop yields that fall below what they should be. Liquidity is another risk management tool farmers can use. This refers to one’s ability to generate cash quickly to meet financial obligations, like selling farm equipment to pay a bill or loan payment.
#4 Market Research
You may have a gut feeling that your agribusiness will be a significant success. However, it’s still important to conduct thorough market research to understand trends, the potential return on investment, and other noteworthy factors. You should research the average cost of property in the area and even take time to visit other area farms to understand their position in the market. This is where a SWOT analysis can come in handy, which analyzes the strengths, weaknesses, opportunities, and threats in a given market.
Governmental and Institutional Support for Agricultural Lending
While you can work with local banks or private companies to gain agricultural lending, several governmental and institutional programs can offer financial support, including:
- Subsidized Loan Programs
- Training and Education Programs
- Research and Innovation Grants
Subsidized loan programs have favorable terms and are backed by government initiatives. For example, the Farm Loan Program with the USDA’s Farm Service Agency provides credit access to family-sized farmers and ranchers.
Some state agencies also have specific programs, such as the AgriLink Deposit Program in Ohio. This program is available to farms with at least 51% of their land farmed in Ohio. Qualifying farmers can apply for low-interest loans through the State Depository Bank, and when approved, those loans are submitted to the state treasury.
Training and Education Programs
While financial assistance and agricultural lending are certainly valuable, it can also be helpful to participate in workshops and courses on financial management and business planning. Several area colleges and universities offer agribusiness education programs for new and seasoned farmers.
For example, Ohio State University offers an online Farm Financial Management course to help prepare farmers to operate a commercial farm with economic stability while remaining profitable and being able to grow. The course covers topics like farm taxes, record keeping, risk management strategies, and calculating the cost of production.
Another option is to consider research and innovation grants, as various funding opportunities are available for innovative agricultural practices. For example, the USDA offers Urban Agriculture and Innovation Production grants to help people in urban areas and suburbs — which typically lack green space and large plots of land needed for farming.
These grants are used to target areas under the issue of food access, like covering start-up costs for new farmers and working to develop necessary policies related to zoning and other urban agriculture needs.
Benefits of Agricultural Lending for Small and Large Farms
For a lot of farmers, agricultural lending is what makes business possible. It can help you protect your business, finances, and assets when facing factors out of your control, like poor weather and crop yields.
But agricultural lending isn’t just to protect your farming business. It also funds innovation and long-term growth. While it’s important to take the time to ensure seeking financial assistance is the best move for your business before applying, there are countless benefits to be had from seeking agricultural lending.
One of the most significant ways agricultural lending can benefit your farm — no matter how big it is — is by boosting production capacity. Agricultural loans can fund modern, high-quality farm equipment to help you do your job faster and more efficiently. Streamlining operations like this allows you to do more in a shorter time.
For example, maybe it takes an entire week to harvest all your crops. Still, with the right machinery, you could trim that time down to just a few days, making you more efficient, which provides you with an opportunity to boost sales and profits.
Diversifying Agricultural Activities
Agricultural lending can allow you to invest in your farm’s growth in a variety of ways, one of which is providing you the opportunity to diversify your agricultural activities. You can use agricultural loans and grants to venture into new crops and livestock or pursue larger projects like the growing agritourism sector.
Agritourism is a commercial enterprise where farmers attract visitors to their farms or other agricultural businesses to entertain and educate tourists. Farms and businesses that offer U-pick activities, pumpkin patches, corn mazes, on-farm markets, vineyards, and wineries are all examples of agritourism.
Another significant benefit of agricultural lending is the ability to use funds to enhance farm infrastructure by making repairs or improvements, building storage facilities like silos or other necessary developments like irrigation systems.
Farms require constant upkeep to run efficiently, and some upgrades and repairs you may need on the farm over time can be expensive. This is where your agricultural loan comes into play. Using these funds to make capital improvements like this can boost your farm’s overall value and your image in the eyes of consumers — both of which are keys to your agribusiness’s success.
Conclusion
Agricultural lending is a financing option for people in the farming industry. It funds agricultural business operations like purchasing farmland and equipment, boosting production capacity, and improving farm real estate.
Whether you’re a newcomer or a seasoned professional, farming is an expensive venture, often full of risk. This is why agricultural lending is so important in modern farming, where equipment and machinery can rack up costs quickly, and the volatile climate can negatively impact crop yields.
Agricultural loans have the potential to drive growth and even promote sustainability in the industry by providing necessary funding to get more innovative, experimental projects off the ground. Today’s farmers should educate themselves on agricultural lending and the options available, as these loans can be vital in ensuring farms run smoothly and are positioned to see long-term growth.
