By Lynn Kime, Linda Falcone
Unless you are independently wealthy or have been saving for several years prior to beginning your agricultural venture, you will probably need some form of financing for your farm.
In previous articles, I have stressed the idea of starting small and growing your business. This not only allows you to learn as you go but is also much easier to finance. Having a written business plan will show funders how you plan to use funds and how repayment will be made. There are many ways to finance your new enterprise.
The most commonly used method of financing for new farmers is the use of credit cards. This may not be the most cost effective but may be the easiest method to use. As always, try to keep credit card balances as low as possible. These are unsecured loans and carry the highest interest rates. If credit card balances become too high, it may take years to pay off the debt and stress your business finances over time.
One of the newest methods of financing your business is crowd funding. You may need to have relatives or close friends provide some initial funding as some sites require you to have a percentage funded before you can use their site. You may have a limited time to raise the necessary funds before the site will close your funding attempt. Posting your business plan may also be necessary to attract funders.
Having a good working relationship with your bank or credit union will help if you approach them for funds. Some banks do not lend to agricultural producers or have agricultural loan departments which will force you to contact another institution. There are institutions that have experience lending to agricultural producers, and you may want to contact them first. Keep in mind that the first thing most lenders will do is check your credit score. You should always know your credit score before applying for any loan. Having an acceptable credit score will help the discussion and process with the lender.
The Farm Credit system specializes in lending to agricultural operations. They have experience in the agricultural world and in determining how and when start-up operations will have the funds to repay loans. You may only make interest payments for most of the year to help keep payments low until income is available to pay on the loan principal. Their loan officers have experience with most agricultural enterprises and industries which is invaluable when discussing your needs with the loan officer. Many Farm Credit systems also give preference to new and beginning farmers and want to work with you to help you become a successful farmer.
The Farm Service Agency (FSA) is a part of the United States Department of Agriculture (USDA) and has many specialized options. They give preference to beginning, minority, and veteran farmers when evaluating the loan package. FSA interest rates are lower than many other options, but you must have been turned down from another source before you qualify. They do not rely on or use your credit score, but you must have an acceptable credit history.
FSA also has a microloan program that can provide up to $50,000 for both ownership and operating expenses which might be attractive to many beginning farmers. For the ownership funds, you must have three years farm managerial experience, but this requirement is reduced for operating microloans. FSA can use up to 100% of the value of the item or land purchased as collateral for the loan.
FSA also has more traditional farm ownership and operating loans that allow you to borrow more than the $50,000 depending on the type of loan. FSA is awarded a specified amount of money each budget cycle so, in lean farm income years, funds may not be available year around. They also have specific programs for items such as grain bins, specialized equipment like refrigerated trucks to transport produce, and additional needs. Check with your local FSA office to inquire about their programs.
If you are working with another lender, FSA may guarantee the loan for the other funding source. They do charge a percentage of the loan but, but an FSA guarantee may mean the difference between getting a loan or being turned down.
As you can see, there are several sources of funding for a new farm business. Be careful to research all potential sources and be very judicious with the funds borrowed as you will need to pay back everything you borrowed. I will caution you that many beginning farms and businesses fail due to being underfunded at start-up. Don’t forget that even if you have secured loans for land and equipment, you still need additional funds to operate and pay debt-service. Your business plan will help tell your story to the funding source. The financial documents within the plan will show when funds will be needed and how you will be able to pay back all funds borrowed.
Source : psu.edu