What is an Agriculture Loan?
As anyone who runs a farm knows, it is an expensive business with many overheads. These include having to pay for farm equipment, covering operating costs and even buying new pockets of land. Often a great deal of cash is already tied up in the business, so it becomes necessary to borrow money, and agricultural loans are a generally low-interest way to raise the needed funds.
Reasons For Taking an Agriculture Loan
There are many reasons to take out an agricultural loan which we helpfully explain in further detail below.
1. Real estate purchases and improvement
Sometimes the opportunity arises for a farm to expand or to enhance its existing land, and there may be a need for loan which can be obtained and paid back over a chosen period of time.
2. Vineyard and orchard development
Valuable crops like grapes and orchard fruit need more care and investment than other types of agriculture, especially during the years when they are being first developed.
3. Packing and storage facilities
Many farms today are taking control of their own packing services to minimize overheads, and there is always the need for storage facilities. As these demands grow, so does the need to pay for them.
4. Timber/Land purchases
Investing in timber forests may be outside the scope of many farms and ranches but, in some areas of the country, there are opportunities to invest over the long term and profit from timber sales.
5. Livestock purchases and feed
A major overhead for farms, especially when they are starting out, is the purchase of livestock and their feed. So these are often used as first time farmer loans to cover costs as the business becomes established.
6. Production and processing equipment purchases
Where production and processing are included in the business, farm equipment financing is needed to invest in the potentially complex requirements for these processes to be carried out.
7. Building repairs and improvements
Farm buildings are often exposed to harsh conditions and heavy use all year round, so it is little surprise that repairs, and the agriculture loans to pay for them, are often needed.
8. Construction development
There are times when additional construction needs to be carried out and loans may be needed not just to pay for the building work, but also for the planning and preparation leading up to it.
9. Water development and irrigation projects
The importance of good irrigation and drainage can’t be overstated, so one of the most significant investments any farm can make is in ensuring that crops remain well-watered all year round. Large projects like this, however, often require a large budget.
10. Operating expenses
Operating expenses are always high, especially when starting out. So many first time farmer loans are wholly or partly intended to cover operating costs until profitability is achieved.
11. Debt refinancing
Often, farmers seek loans to refinance debt which has built up over a period of time. These can also include farm loans with bad credit, which are also available from many lenders.
Agriculture Loan Types
There are many different kinds of agricultural loans, and the one that's most suitable for you and your business depends on a number of factors. These range from the term it’s to be paid back over to its main purpose.
- Long-term Farm Loans—paid back over ten years or more. Therefore, these tend to be for larger amounts and are typically used to pay for construction projects or used as heavy equipment loans.
- Intermediate-term Agricultural Loans—generally paid back between four and ten years with many being used as farm equipment loans. When they are paid off, it may well be time to invest in new, or replacement, equipment.
- Short-term Agricultural Loans—suitable for short-term needs and do not normally exceed four years. They are also more likely to be part of a microloans program.
- Agriculture Real Estate Loans—suitable for higher amounts and have a longer repayment period, in much the same way as a mortgage.
- Agriculture Term Loans—agriculture loans that have a fixed term over which they have to be repaid, unlike a revolving line of credit that has no fixed term.
- Agriculture Operating Loans—designed to cover the operational costs of starting or maintaining a farm and helping it to prosper.
How Do Agriculture Loans Work?
These work like any other loan. An agreed amount is lent which is then repaid in regular installments over the agreed term.
How to Apply for an Agriculture Loan?
The first step is to prepare a case for why a loan is needed, outlining the benefits it is expected to bring. Often, it’s best to approach the farm’s main bank as they will know a little bit more about the business concerned. The FSA also offers all kinds of help from farm equipment financing to emergency loans.
What Are Farm Loans?
Farm loans are very similar to agriculture loans and the terms are quite interchangeable. One difference is that some kinds of farm loans are aimed at particular groups of people - for example, farm loans for veterans and young farmer loans. They can also be known as ranch loans and tend to offer comparatively low interest rates with flexible terms for payment.
The Difference Between Agriculture Loans and Farm Loans?
There’s no largely specific and agreed difference between agriculture and farm loans, although agriculture loans do tend to be utilized more for a specific purpose, e.g. used in payment to an agricultural equipment manufacturer. On the other hand, a farmer’s home administration loan may have a more general use, and could also be classed as a farm loan.
Farm Loan Types
1. Farm Operating Loans
These are a very valuable way to start, maintain, and improve a farm or ranch and its operation. They are particularly useful as a beginning farmer loan when operating costs will almost certainly be greater than the farm's income.
2. Microloan Programs
These are generally aimed at smaller, more niche, operations, including those that achieve most of their sales directly, for example, via farmers’ markets, and therefore need lower levels of financing.
3. Farm Ownership Loans
As the name suggests, these are loans used to acquire farmland and can sometimes also be known as an FSA beginning farmer loan. There are, generally, no previous form of ownership requirements, and up to 100% financing is available.
4. Guaranteed Farm Loans
These are loans from USDA-approved lenders that can be guaranteed by the FSA for up to 95% of their value, thus providing a valuable safety net for the borrower.
5. Minority and Women Farmers and Ranchers
The FSA is committed to offering opportunities to all sectors of society, so funds are exclusively put aside for farm and ranch loans available to women, African-Americans, Alaskan Natives, Native Americans, Native Hawaiians, and Pacific Islanders, and people of Hispanic or Asian origin.
6. Beginning Farmers and Ranchers' Loans
There’s a real commitment to bringing on the next generation of farmers, so the FSA also has money intended to be paid out in the form of young and beginning farmer loans.
7. Emergency Farm Loans
These loans are triggered by a natural disaster, as designated by the Secretary of Agriculture or the President, and aim to pay to make good any damage or losses that are caused by it.
8. Native American Tribal Loans
The aim of these is to help tribes obtain additional property within the reservation to increase agricultural productivity and also to work alongside Indian reservation payday loans.