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Guide to Agriculture and Farm Loans

What Are Agricultural & Farm Business Loans?
Lauren Ward
Lauren WardUpdated March 26, 2022
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If you own a farm, ranch, or other agricultural business, you may find yourself in need of extra capital from time to time, say to upgrade equipment, cover seasonal gaps in revenue, purchase land, or expand your operations. And, if you’re just starting out in the farming industry, you may need access to a fair amount of cash to get your agricultural business up and running.Fortunately, there are a number of business loans available to farmers and agricultural entrepreneurs, including federal farm loan programs, farm loan programs offered by commercial lenders, short-term loans, and business lines of credit.  The best business loan option will depend on the size of your business, your credit profile, your collateral, how much capital you need, and how long your farm has been in operation. Here’s what you need to know about small business agriculture loans.

What Is a Farm Loan?

A farm or agricultural business loan is intended to help someone maintain, expand, or start a farming business. Farm loans can provide the capital needed at the start-up phase of an agricultural business, as well as help established farmers manage cash flow during off seasons, purchase heavy equipment, fund construction or irrigation, hire workers, or improve/ expand their operations.Farm loans come in the form of short- and long-term installment loans, lines of credit for incremental purchases, equipment financing, and more. Many different entities provide business farm loans, including government programs for agriculture businesses, as well as banks, nonprofits, and online lenders.

How does a Farm Loan Work?

Just as there are many different types of business loans, there are also many types of farm loans, and each one operates a little differently. Government-backed farm loans can typically be used to start, buy, run, or expand a farm. These loans are similar to traditional term loans: You receive a lump sum (the principal) up front and then be given a period of time — anywhere from 10 to 40 years — to pay it back, with interest added, during which you would make predetermined, fixed monthly payments. Business farm loans from commercial lenders work in a similar way, except they may require higher down payments, shorter payback periods, and higher interest. Commercial lenders also offer famers business lines of credit, equipment loans, and invoice factoring.

Does It Differ From Business Loans for Other Industries?

The United States Department of Agriculture’s Farm Services Agency, or FSA, has several farm loan programs designed to fit the needs of new and established farming and agriculture businesses. Some commercial lenders also market loans specifically to farmers and agricultural businesses. However, these so-called “farm loans” work in a similar way to traditional business loans. Standard small business loans, offered by banks and other business lenders, are also often available to farmers.

Types of Loans for Agricultural Businesses

Below are some small business agriculture loans options you may want to consider.

USDA Farm Loans

The USDA Farm Service Agency (FSA) has several farm loan programs that can provide needed capital to farms, ranches, and agriculture businesses.The FSA’s Direct Farm Operating loan program, for example, provides loans up to $400,000 for starting or operating a farm or ranch. The funds can be used for a range of purposes, including purchasing livestock, buying farm equipment, paying operating expenses, improving/repairing buildings, and developing land. Down payments can be as low as 5%, and interest rates are fixed, and tend to be low.USDA farm loans also come in the form of microloans ($50,000 or less). Borrowers are allowed to take out two microloans for a total of $100,000. One microloan can be used for the land while the second microloan can be used for equipment or operating expenses. The FSA also has Guaranteed Farm Loan programs that make it easier for farmers to receive loans through commercial lenders. Through these programs, the FSA guarantees a large portion of a business loan and, thus, makes farmers more attractive as borrowers.

Long-Term Farm Loans

Long-term business loans, available to farmers through banks and other lenders, are defined as having repayment terms that range from two to 25 years. The loan proceeds can typically be used for any business purpose, including purchasing supplies or inventory, buying livestock, or using the funds as working capital. Farmers receive the entire loan amount all at once, then make fixed monthly payments, based on the loan amount, term, and interest rate.  Because the repayment period is long, lenders are known to have strict qualification requirements, including being in business for at least two years and having a strong credit profile

Business Lines of Credit for Farms

A business line of credit (LOC) can be a good option if you don’t know exactly how much capital you’re going to need for your farm. An LOC works in a similar way to a credit card: You get approved for a credit limit and then draw money on demand at any time up to the credit limit. You are only responsible for paying interest on what you actually borrow. Many farmers and ranchers use LOCs to remedy intermittent cash flow issues or cover unexpected expenses.  

Short-Term Loans for Agricultural Business

A short-term loan can be a good option if you need money quickly or have been turned down by traditional lenders. Offered by alternative and online lenders, this type of business farm loan provides a lump sum of cash that gets paid back (with interest) over a short period of time, often six to 18 months. Short-term loans are typically repaid through daily, weekly, or monthly payments. Qualification requirements aren’t as strict as with traditional long-term loans, and you can often get access to funds within 24 hours. Because they can be funded quickly, short-term loans work well for working capital, filling seasonal revenue gaps, or covering an emergency expense. However, these loans tend to come with higher costs than other types of financing,

Equipment Loans

Equipment loans are a common loan for agricultural businesses, as farm-related machinery is typically expensive and may exceed a farm’s typical cash flow.  Generally, the way an equipment loan works is that the vehicle or machinery you are purchasing is used to secure the loan, which means you shouldn’t have to put up any additional collateral. Another plus of equipment financing is the loan terms often mirror the actual life expectancy of the equipment itself. So, if the machinery you’re purchasing has an expected useful life of 15 years, you may be able to get a repayment period of the same length.

SBA Loans

Small Business Administration (SBA) loans are a type of long-term business loan backed by the government, which means that if a borrower defaults, the SBA will cover most of the cost. Though SBA doesn’t offer any loan products specifically targeted to agricultural or farming businesses, it does serve the industry.Because the SBA guarantee lessens the risk to the lender, SBA loans typically offer large amounts, low rates, and long repayment terms (up to 25 years). However, these loans are tough to qualify for and require a lengthy application and underwriting process that can take several months. 

Invoice Factoring

Invoice factoring is a form of fast financing in which you sell your unpaid invoices to a third party lender, who immediately gives you a large portion of the invoice amounts up front. The lender is then responsible for collecting on those invoices and, when they do, they give you the balance of the invoice, minus fees (called factoring fees, which are a percentage of the invoice amounts).Because this type of financing is based on invoices, your credit score isn’t a factor. And, no collateral is required. However, invoice factoring tends to be more costly than other financing options.  

Business Credit Cards

A small business credit card can be a handy financial tool to have in your back pocket. It can allow you to buy supplies, cover operating expenses, or handle an emergency without waiting to get approved for a loan. And, with some research, you may be able to find business credit cards with low interest rates. Some cards even offer a 0% introductory APR (which may last as long as 21 months). This might allow you to cover an unusually high farming expense, then pay the card off before the standard interest rate kicks in.

Pros and Cons of Loans for Agricultural Business

Taking out a loan for your farm or agricultural business can be a lifesaver — it can help you manage seasonal dips in revenue, purchase new equipment, hire more workers, and make changes that can boost your profits. If you’re just getting into the agricultural business, a farm loan can provide the cash you need to get you through the startup phase. Because there are several government-backed lending programs available to farmers, you may be able to get financing with a low interest rate and favorable terms. And, if you get an equipment loan, the item you’re purchasing can serve as collateral.On the downside, farm loans with attractive terms and rates can be difficult to qualify for and the application process can be extensive. In addition, you will most likely need to make a down payment on any farm loan. You may also have to put up an asset as collateral or sign a personal guarantee (which would put your personal assets at risk).

Finding Farm Loans

Farm loans can be found from many lenders. The USDA’s FSA program can be a good place to start your search, since these loans offer some of the lowest interest rates and a down payment requirements. You may also want to look into SBA loans, which also offer low rates and attractive terms.Many private lenders also offer loan products that can be useful for farmers, including short-term loans, business lines of credit, and equipment financing. These loans may be easier to qualify for and faster to fund, but generally come with shorter payback terms and higher rates than FSA or SBA loans.

Applying for Farm Loans

The process of applying for a business loan for your farm will depend on the lender and type of loan you're trying to get. For all business loans, however, you will need to provide basic information about yourself and your agricultural business, such as your name, business name, address, phone number, social security number, and federal tax ID.You will also likely need to prove that your farm is creditworthy and has the means to pay back the loan. Additional documentation to receive a farm loan may include:
  • Business and personal bank statements
  • Income statements
  • Business and personal tax returns
  • Balance sheets
  • Profit and loss statements
  • Business and personal credit scores
Approval times vary based on the loan you’re trying to get. Government farm loans may take several weeks or months, while some alternative loans are instantly approved. To make the loan process as efficient as possible, follow the application instructions to the letter, and make yourself available in case any questions come up.

Alternative Financing Options

If you don’t qualify for financing, or prefer not to take out a loan, there are some other funding options for your farming business. These include:

Farm Grants

Financial support for small farms and farm-related businesses in the form of grants is available from a variety of federal, state, and local agencies, as well as private organizations. For example, the USDA also offers Value-Added Producer Grants, which can be used by farmers to expand marketing opportunities, create new products, and boost income. To research grant options available to farmers, you can go to the USDA’s resource page. Many farm grants are also available at the state level. To learn more about local grant opportunities, visit your state’s Department of Agriculture website.

Help for Agricultural Entrepreneurs

PA Farm Link connects new farmers with retiring farmers. As part of the program, the retiring farmers provide financial assistance to the new farmers until they are able to get their farms up and running. This can be a helpful alternative for anyone struggling to get startup capital for their farm.

Explore Small Business Loan Options

If you’re looking for capital to start or grow your agricultural business, there are a number of financing options you can explore. Finding the right loan at the right price, however, can take a fair amount of time and legwork. One way to simplify the process is to use an online loan search platform. With Lantern by SoFi’s loan comparison tool, for example, you can get access to multiple financing options matched to your needs and qualifications with just one application.
Photo credit: iStock/Likoper
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC1221023

Frequently Asked Questions

Can you get an agricultural business loan with bad credit?
What are typical interest rates on farm loans?
Are there startup loans for farms?

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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