If you’re looking to apply for agricultural loans in 2022, National Business Capital has your back. Our comprehensive guide on agricultural lending and financing gives you everything you need to know before you start the process, giving you an undeniable competitive edge as you secure favorable terms to grow your business.
Whether you’ve owned your farm for decades or are just beginning to step into the agricultural industry, you’ll need substantial capital to keep your doors open and earn a spot amongst your competitors.
Expensive equipment, seasonal periods of low business activity, and working capital management can all stand in the way of business growth, not to mention the risk of weather-related concerns damaging your inventory.
One small misstep could potentially set your organization back if you don’t have the funds to right the wrong, which is why it’s so important to have a financing relationship as you navigate through and become profitable within the agricultural industry.
Some entrepreneurs believe financing is only used when your business falls into the red, but this couldn’t be further from the truth. Many savvy business owners have used financing options to support their growth, which has allowed them to outpace their competition at a record pace.
Think about it: Have you ever been faced with a growth opportunity that you couldn’t afford at the time? With financing, you can easily afford that opportunity and, most importantly, come out on the other side as a much stronger organization.
There are various financing options specific to the agricultural industry, but you can also use more traditional options to support your operation.
Regardless of the avenue you choose, you should have a good understanding of what you’re getting yourself into before starting to secure your agricultural loan.
Here’s everything you need to know about agricultural loans:
1. What is an agricultural loan or a farm loan?
Agricultural loans, also known as farm loans, are financing options designed for entrepreneurs and business owners in the agricultural sector. The majority of financing options are term loans, meaning that you’re given a one-time lump sum payment that you must repay within the terms outlined by your lender, but there are others that you can tailor to your specific needs.
Your use of the borrowed funds will depend on the program you opt into, as the majority of options are only available for specific purposes. For example, farm ownership loans are only for situations where you’re purchasing or expanding a farm, so you won’t be able to secure one of these loans if you need capital for other reasons.
Traditional options are also available to you. These options are generally more flexible compared to the more specific agricultural loans, but you may find it difficult to qualify.
Traditional lenders, like banks and credit unions, carry strict eligibility requirements that require you to have a lengthy time in business, a strong credit score, and consistently high revenue.
Because of the cyclical nature of the agricultural industry, it might be difficult to convince a lender you qualify, which may deter you from going down this avenue. But that doesn’t mean you shouldn’t apply. You never know which lender will approve you, so it’s best to speak with as many as possible to ensure you’re getting the best deal.
Growing businesses often invest their profits back into their operation, which also adds a degree of difficulty when it comes to traditional financing.
Lenders want to see profit, and if you’re using your profit as soon as you get it, they might see financing you as a risky endeavor, even if your bank statements show that you’re more than capable of paying back a sizeable loan.
Online lenders tend to have looser qualifications and, in turn, might be a better option for agricultural businesses seeking to move to the next level.
2. What are the different types of agricultural loans?
There are different types of agricultural loans that you can apply for,
Information is power, and it’s best to understand all the options available to you before you start the process. Here are the various types of agricultural loans offered by the U.S. Department of Agriculture (USDA):
2.1. Operational Loans
- Borrowing maximum: $400,000
- Repayment terms: max. 7 years
Operational agricultural loans are used to cover operating costs and the purchase of livestock, seeds, and equipment. New entrepreneurs can also use them to cover the startup costs associated with a farm, including the living expenses you incur as you get your venture up and running.
Operational loans feature a borrowing maximum of $400,000 and maximum repayment terms of 7 years, but you can borrow less for a shorter period of time if you don’t need substantial financing.
Additionally, you might need to give your lender a detailed plan of how you intend to use the borrowed funds, as there are strict requirements on what operational farm loans can be used for.
2.2. Farm Ownership Loans
- Borrowing maximum: $600,000
- Repayment terms: max. 40 years
This financing option is used to purchase a new farm or expand a current farm. You can also use a farm ownership loan to help pay closing costs, build or improve structures on your land, increase your productivity, and assist with land, soil, and water resource preservation.
Farm ownership loans carry maximum borrowing limits of $600,000 and maximum repayment terms of 40 years, allowing you to tailor your financing to your specific needs.
Farm ownership loans are broken down into another subcategory: Direct Farm Ownership Down Payment Loans.
This option is designed specifically for new farmers, women, and minority applicants in the agricultural industry and is the only loan program offered by the FSA that doesn’t provide 100% financing. Instead, the borrower provides 5% of the purchase price and is, in turn, more likely to reach approval.
- Borrowing maximum: $50,000
- Repayment terms: max. 25 years
As the name suggests, microloans are smaller financing options used when agricultural entrepreneurs need a minor influx of capital.
This option is available to almost everyone in the agricultural industry, including truck farms, farmers’ markets, CSA’s (Community Supported Agriculture), restaurants and grocery stores, or those using hydroponic, aquaponic, organic, and vertical growing methods, according to the USDA’s Farm Service Agency.
With maximum borrowing amounts of $50,000 and maximum repayment terms of 25 years, any entrepreneur or business owner in the industry can tailor this financing option to their needs and maximize the benefits.
2.4. Emergency Loans
- Borrowing maximum: $500,000
- Repayment terms: max. 10 years
Mother Nature can turn your profitable farm into an inoperable money pit in a few short hours. Fortunately, the FSA offers emergency loans for this very purpose, allowing farmers and agricultural business owners to recoup after a natural disaster.
However, a nasty storm won’t qualify you for this financing option unless the Secretary of Agriculture designates an event as a natural disaster or the President of the United States declares a “state of emergency.”
Additionally, you’ll need to have sustained at least a 30% reduction in your primary crops to qualify for an emergency loan.
2.5. Youth Loans
- Borrowing maximum: $5,000
- Repayment terms: max. 7 years
The cost of starting a new farm is a hurdle to many entrepreneurs looking to get their foot in the industry, especially young ones.
However, young entrepreneurs can get their start in the industry using a FSA-sponsored youth loan, which features a maximum borrowing limit of $5,000.
To qualify, you’ll need to have a project manager sponsor you, and this individual needs to be capable of supervising, training, and helping you as you move throughout the process. If you’re under the age of 18, you’ll also need a parent or guardian to consent to the application.
The FSA also offers specific financing programs to women, minorities, and other targeted groups, like Native Americans, to help them kickstart their entrepreneurial journey in the industry.
These programs feature lower borrowing limits compared to other FSA programs, but the repayment terms are lengthy and forgivable, allowing anyone in these groups to start off on solid footing.
3. What are the types of traditional agricultural loans I can get?
If the abovementioned options don’t work for your specific circumstances, you can seek other options to help your organization grow. Some of the traditional agricultural loans that you can get include term loans, business lines of credit, equipment financing, SBA loans and more.
Or, if you plan enough, you can potentially secure a traditional option on top of your FSA-sponsored loan, allowing you to grow and outpace your competition without restraint.
Here are some of the most common financing options available to agricultural business owners:
3.1. Term Loans
Term loans are given in one-time payments that you’ll repay to your lender over the term you agreed upon. Most FSA options are term loans, but if you choose to finance outside of the FSA, you can potentially secure a much larger loan amount.
There aren’t necessarily maximum borrowing limits, but you’ll have to repay the borrowed amount generally within 25 years of the start date.
3.2. Business Lines of Credit
A business line of credit is a revolving credit line from which you can draw physical cash whenever you need it. When you repay the borrowed amount, you can draw the same funds again, allowing you to stay one step ahead of the next challenge.
Many entrepreneurs tend to avoid using this financing option for large purchases or aggressive expansions of your operation because interest rates are often higher than other financing options.
Instead, it can be used for minor expenses or to supplement other financing options, giving you a method of staying on top of your operational costs as you repay the more substantial loan.
3.3. Equipment Financing
The agricultural industry relies heavily on expensive and bulky equipment to conduct a majority of its operational tasks. While this equipment does make the job easier for everyone involved, the cost acts as a hurdle to entrepreneurs looking to get into the industry.
Chances are, you won’t have $250,000 on hand as you’re starting your farm to afford one piece of equipment, which is where equipment financing comes into play. Rather than front the entire cost of the equipment, this financing option breaks down the sizeable purchase into much more manageable monthly payments.
This, of course, comes at a cost through your interest rate, but it can help you get your foot in the door regardless of the price.
3.4. SBA Loans
SBA loans are highly coveted due to their high borrowing limits, low-interest rates, and favorable repayment terms, but they’re also difficult to qualify for. This is because the government partially guarantees 75% to 85% of the borrowed amount, meaning that they’ll pay that balance if you default on the financing.
The extra layer of security restricts eligibility, but if you can qualify, you can borrow up to $5 million with some of the lowest interest rates on the market.
The aforementioned programs are some of the more common, but there are so many more that you can use to support your growth.
If you’re looking to explore your options, consider teaming up with a marketplace, like National Business Capital, which can connect you with 75+ lenders using their innovative platform.
4. Secure Competitive Agricultural Loans with National Business Capital
Searching for a lender is complicated and requires you to take time out of your busy schedule, which is something not many business owners can afford as they manage the day-to-day of their business.
Not to mention all the consideration you’ll have to put into your decision, as you’ll need to carefully review the interest rate, repayment terms, and other factors to ensure you’re capable of paying back the borrowed amount within the term.
All of this can be overwhelming, but you can streamline your search for financing by teaming up with National Business Capital.
At National, our experienced team of Business Finance Advisors does the heavy lifting for you. They take the time to learn about you, your business, and the challenges you face starting from the initial consultation.
Then, they get to work and find a lender who can offer terms that meet the needs of your organization, allowing you to maintain your focus on what matters most—your business.
Ready to get started? Complete our streamlined, digital application in mere minutes and take the first step toward securing an agricultural loan that will help kick start your growth.
What Is an Agricultural Loan Called?
An agricultural loan, otherwise known as a “farm loan,” is a financing option available only to those in the agricultural industry. These loans can be used for a variety of purposes, such as purchasing livestock, expanding an existing farm, or updating your equipment to the latest standard.
While these options are specific to this industry, farmers and agricultural business owners can also secure traditional financing options, like business lines of credit and equipment financing.
What Bank Is Best for Agriculture Loan?
There are a variety of banks and credit unions that can finance your agricultural business, but the benefit of each organization will depend on your specific needs and circumstances. There isn’t necessarily a “best” bank for agricultural loans, just like there isn’t a “best” online lender.
You’ll need to research lenders and compare their programs to find the best agricultural loan for your business.
Are FSA Loans Good?
The FSA offers financing options specifically for those in the agricultural industry. Each option is uniquely beneficial for certain circumstances, but almost all of their financing programs have forgiving repayment terms and lower interest rates on average.
The only downside is the low borrowing limits. Farm ownership loans max out at $600,000, which is noticeably lower than what you can borrow with a term loan or SBA loan.