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Need a loan? Remember the basics

Many farmers use debt to finance their seasonal expenses. However, a loan can also help farmers refinance and remain more resilient during tough times by providing funds for expansion and greater sustainability as a business.

“Fundamentally, debt is a tool; it is neither good nor bad on its own, like any other tool, ”said Andy Larson, agricultural outreach specialist at the Food Finance Institute at the University of Wisconsin at Madison, during a recent webinar hosted by Food Animal Concerns Trust, “Farm loans: how and when to use debt to finance your farm business. “

Regarding debt, Larson said many people have “heard horror stories in their lives about repossessions, bankruptcies or farm auctions.”

It’s not always the case. Mortgages are sometimes paid off sooner. Lenders may also have your best interests at heart.

Rather than seeing debt as an unwanted option, Larson said the key is to think of it as rent on an asset the business needs for maximum productivity. “Many of you are probably renting vehicles, facilities, or farmland, but a little extra money can help you farm better,” he said.

Loan Basics

Larson defines financing as financing a business. Equity is the property of an asset. Collateral is an asset that secures debt.

“These are things the bank takes back and sells on if you don’t pay back your loans,” he said.

A lien is a legal claim on assets. A mortgage or agricultural guarantee contract are examples. Furniture is non-real property, such as tractors, livestock, processing equipment, or many other items.

Default means breaking a loan agreement. A guarantee is a promise from a third party to help bring an entire lender into a collection situation.

Whether a farmer should get a loan depends on many factors. But someone who is just starting the business shouldn’t get a farm loan, Larson said, adding that getting farming experience “for someone else’s dime” is much better than getting farm experience. take out loans to start farming.

Management and marketing separate successful and unsuccessful farmers. He calls record keeping the backbone of smart farm decision making.

The use of personal money is also required, in addition to sweat equity.

“It demonstrates the commitment to the company,” said Larson.

The farm business plan should show a potentially profitable business model that will only develop with a loan.

Loan possibilities

The three main types of farm loans include short-term loans or lines of credit that include working capital for the current growing season.

“With a loan, you get the proceeds up front and you pay interest on the full amount you borrow; Lines of credit allow you to access an uptime line when you need it. You only earn interest on what you have advanced, not on the entire line of credit, ”said Larson, adding that it should be paid back once the grower sells the produce harvested in that season or over. This year. Movable property is often used as collateral.

Medium-term loans are repayable over two to ten years and are used to purchase machinery, trucks, titled vehicles and livestock.

“The amortization period of loans often depends on the useful life of the asset purchased with the loan proceeds,” Larson said.

Long-term loans take 10 to 30 years to pay off. This includes real estate and improvements, secured by a mortgage.

Choosing a lender doesn’t have to be complicated, but not all banks will lend to farmers or farm businesses. The good news is that many farmers already have an existing relationship with a lender or at least know them by their local reputation.

Lenders may partner with external organizations, such as the Farm Service Agency or the Small Business Administration, depending on the funded project. Farmers can also use more than one financial institution. Larson encourages finding a lender who specializes not only in agriculture, but also in the type of agriculture in which the farmer is involved.

What you will need

Lenders will likely need to see two to three years of tax returns, business income, other income, income and expense trends, tax burden, capital gains or losses, schedules for amortization, which is available for collateral, working capital position, accrual adjustments, and equity.

For a new business, Larson said a lender will also need to see a business plan so they can say how the money will be paid back.

Credit decisions can take time, he said, but having complete information can help speed up the process.

Non-bank lenders should also be considered, as should financial organizations serving small businesses or farms, and financing from dealers or vendors. Leasing can also help some farmers.

Other types of financing include leasing, forgivable loans, grants, and cost sharing.

Beginning farmers face greater risk due to their inexperience, Larson said. This is why banks are less likely to lend money to new farmers. He said new farmers should minimize the amount they need to borrow and instead focus on demonstrating the strength of their business model. This could include leasing land, borrowing equipment, keeping good records and filing a Schedule F.

The business plan should also highlight a farmer’s ability to establish their market, demonstrate cash flow, reinvest in the business, save for the down payment, build momentum and start the business. ‘business.

In order to “sell themselves” to a banker, a new farmer must “keep their daily job,” Larson said. “A majority of farmers in the United States depend on off-farm employment for benefits and regular income. “

Farmers should also treat the business like a business with a separate checking and debit account. The checkup should be completed every December 31 or more often.

“Know the cost of production and not guess,” Larson said. “Know what goes into the cost of any agricultural product you produce. “

He also suggests going to meet bankers before the first need for a farm loan arises, as well as a tax advisor, financial planner, etc.

“Be responsible for the debt you incur,” Larson said. “Have a plan that’s based on data, not wild guesses. ”

Sergeant writes from central New York.

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