Farm Loan Basics Am I Ready to Borrow Money?

An Outsider’s Perspective of the Loan Approval Process

An Insider’s Perspective of the Loan Approval Process

Debt CapitalEquity Capital Borrowed money, Ownership stake, repaid in the future,yields $ (dividend) to Owed to creditorshareholder, typically held as an investment Flavors of Capital Funding

Debt CapitalEquity Capital LoanYour savings Credit cardMom and Dad Pawn shop Sale of stock Neighbor helping out Angel Investor Specialty Capital Grants CSA shares Where Capital Comes From

 Appropriately structured loan…  To achieve realizable goals…  That are within the capacity of the borrower to manage and achieve…  In order to accomplish repayment and further profitability for the borrower What is Constructive Credit?

 A loan for more than you need…  For a farm enterprise purpose neither you nor the lender understand…  Without adequate assessment of risk…  Without likelihood of repayment. Constructive Credit is not:

Business Plan: Your design for your business  Doesn’t have to include borrowing  But must include source(s) of money For any partnership, business goals must be aligned  Long term viability  High expectations of success  Valuable partner  Farm Credit and our Member-Borrowers have an investment in each other Obtaining Constructive Credit

For you to be a valuable partner:  Business plan  Accurate financials  Honest and ethical relationship For a lender to be a valuable partner:  Knowledge of your type of agriculture  Interest in long-term relationship  Capacity to meet your needs  Competitive products/quality services  Stable staff/access to decision maker  Clear communications Relationship Lending works both ways

You decide how prepared you are to borrow  Understand Your Financial Position  How does it compare to your industry?  How does it fit with your plans and goals?  What needs to happen to get from “A” to “B”  Recognize Your Own Strengths and Weaknesses  Production  Financial  Marketing  Managerial Getting Ready

 Draft a Realistic, Written Business Plan  Goals statement  Resume and References  What needs to happen to get from “A” to “B”  Detailed Financial Statement  Income & Expense with History & Projections  Cash Flow  Marketing Plan  Capital Spending Budget  Source & Use of Capital  Back-up Plan Preparing for Success

 Character  Experience, reputation, history with other creditors (CBR)  Capacity  Earnings, historical and projected  Ability to repay the proposed debt and provide excess funds for family living and CAPEX under reasonable circumstances  Borrower’s sensitivity to rates, input costs increases, decline in demand  Capital  Current financial position  Funds available for down payment, working capital, etc  Post-close position, room for adversity  Collateral  Security position of Lender (and their requirements)  Personal Property or Chattels  Real Estate  Conditions  Additional Terms and Conditions  Reporting requirements, results related requirements  Guarantee requirements The Five Cs of Credit

 Farm Credit  USDA/FSA and SBA (also provides guarantees and credit enhancements)  Local Commercial Lenders  Mission-based Lenders (FarmStart, Carrot Project)  Family  Other individuals  Merchants & Suppliers Sources of Debt Capital to US Agriculture

 Resources:  Cooperative Extension, USDA, Farm Credit  Networking:  Farm Bureau, Farm’s Union and local farmers  MA Association of Roadside Stands, MA Association of Dairy Farms, Worcester County Beekeepers  New England Small Farms Institute/ New England Land Link  Each state has unique programs available I Need Help to Figure this Stuff Out!

To advance family farmers and ranchers build and sustain family farms and ranches and develop the financial and business expertise to qualify for commercial credit. “Serving Family Farms, Cultivating Opportunities”

The Farm Service Agency (FSA), is an agency within the United States Department of Agriculture (USDA). FSA’s Farm Loan Programs (FLP) can provide credit to agricultural producers who are unable to obtain private, commercial credit. FSA places special emphasis on providing loans to beginning, minority and women farmers and ranchers.

 If you are a farmer or rancher who is unable to obtain credit from another lender to start, purchase, sustain, or expand your family farm you may be able to get a loan through FSA’s Farm Loan Programs.  FSA has different types of loans depending on your current situation and what you need the loan for. FSA loan officers are available to answer your questions and to help with the application process.

Guaranteed Loan Program Farm ownership Operating Conservation loans Direct Loan Program Farm ownership Operating Emergency Conservation loans

Farm Loan Programs Information Chart Type of LoanMaximum Loan AmountRates and Terms Direct Farm Ownership$300,000  Term: Up to 40 years  Interest rate: fixed** Direct Down Payment The lowest of the following:  45% of the farm or ranch purchase price  45% of the appraised value  $500,000  Term: Up to 20 years  Interest rate: fixed** Direct Operating$300,000  Term: 1 to 7 years  Interest rate: fixed: ** Direct Emergency The lowest of the following:  100% of actual or physical losses  $500,000  Term: 1 to 7 years (possibly up to 20 years) for non-real estate purposes  Up to 40 years for physical losses on real estate  Interest rate: fixed** Guaranteed Farm OwnershipThe maximum loan amount is adjusted annually for inflation*  Term: Up to 40 years  The interest rate is negotiated by you and your lender.

Farm Loan Programs Information Chart Continued Guaranteed Operating The maximum loan amount is adjusted annually for inflation*  Term: 1 to 7 years  The interest rate is negotiated by you and your lender. Guaranteed Conservation The maximum loan amount is adjusted annually for inflation*  Term: Up to 20 years  The interest rate is negotiated by you and your lender. Land Contract Guarantee A maximum purchase price of $500,000 on a new land contract  Term: Contract payments must be amortized for a minimum of 20 years with equal payments during the term of the guarantee. The guarantee period is 10 years. Youth Loan$5,000  Term: 1 to 7 years  Interest rate: fixed: ** * To determine the maximum loan limit for the current year, please check with your local FSA loan officer at or our website at ** Direct loan interest rates are adjusted monthly and are posted online at and at your local FSA office.

Direct Operating Loan – Meet all general eligibility requirements – Have farm experience equal to minimum 1 year full production and marketing cycle – 7 year term limit for direct OL assistance, with 1 time 2-year waiver – Beginning Farmers may receive no more than 10 years direct OL assistance

Farm Managerial Experience Farming Experience Owner, manager or operator of farm business for minimum 1 production & marketing cycle Monitor production and marketing Hire, assign and supervise workers Oversee maintenance of property and equipment Determine when to cull livestock Select seed varieties; when to plant/seed/harvest; when to fertilize & method Determine crop transportation or storage requirements Raised on farm, management decision-making Employed as farm manager or farm management consultant for minimum 1 production & marketing cycle

Finance modest, income-producing, agriculture-related, educational project that falls under authorized loan purposes Eligibility: 10 to 20 years old Lives in community 50,000 persons or less Project related to 4-H, FFA, Grange Youth Parental permission and supervision Project Advisor Maximum Loan Amount is $5,000 Rates and Terms 1 – 7 years, depending on loan amount and security Direct OL interest rate

Eligibility Requirements – $5, – 10 to 20 years old – Reside in rural area – Have a project advisor – No history of debt forgiveness – Adequate Security – Parent Consent – Annual installments FSA Youth Loans

FSFL Program Purpose Provides low interest financing for producers to build or upgrade farm storage and handling facilities to store the commodities they produce. Eligible Commodities Corn, grain sorghum, rice, soybeans, oats, peanuts, wheat, barley or minor oilseeds harvested as whole grain Corn, grain sorghum, wheat, oats or barley harvested as other-than- whole grain Pulse crops - lentils, chickpeas and dry peas Hay Renewable biomass Fruits, Nuts and Vegetables - cold storage facilities

Maximum Loan Amount Maximum loan amount of $500,000 Loan Process Borrower must meet eligibility requirements COC or STC approval required before construction can begin $100 application fee 15% cash down payment required Rates and Terms 7 years; 10 years; or 12 years depending on amount of loan Interest rate fixed for loan term at rate in effect the month the loan is initially approved Interest rate is equivalent to the rate of interest charged on Treasury Securities of comparable term and maturity

The Farm Service Agency (FSA) developed the Microloan (ML) program to better serve the unique financial operating needs of beginning, niche and the smallest of family farm operations. Examples might include; direct marketing to restaurants and grocery stores, organic production, community supported agriculture (CSA’s) and farmers markets.

 Assisting applicants who have limited experience by providing them with an opportunity to gain farm management experience while working with a mentor;  Eliminate use of high cost personal loans and high interest credit cards;  Providing a bridge for Youth Loan borrowers to transition to larger- scale operations;  Assisting the agricultural community by creating opportunities to start new businesses.

Microloans are direct farm operating loans, either annual or term, that do not exceed $35,000. Microloans have a simplified application process and paperwork and verification requirements that are more proportional to smaller loans and operations.

Microloans can be used for operating expenses including but not limited to: Initial start-up expenses; Annual expenses such as seed, fertilizer, utilities, land rents; Marketing and distribution expenses; Family living expenses; Purchase of livestock, equipment, and other materials essential to farm operations; Minor farm improvements such as wells and coolers; Hoop houses to extend the growing season; Essential tools; Irrigation; Delivery vehicles.

Different types of loans have different eligibility requirements. Some examples of these are: Being the operator of a farm, having sufficient managerial ability, be unable to obtain credit elsewhere but have an acceptable credit history, and are a U.S. citizen, non-citizen national, or qualified alien. For more information on general and loan specific eligibility requirements, visit our website at or see your local FSA loan officer.

Got Experience? Applicants not meeting the general requirement for farm management and experience may still be eligible. Alternatives include an apprentice relationship; past participation with organizations such as FFA, 4-H, Beginning Farmer programs, and Community Based Organizations; even prior small business management experience combined with a self-directed apprenticeship can allow applicant to start farming with a Microloan.

o For an annual operating purpose, such as purchasing seed, fertilizer and other crop input costs, these loans are generally secured by the crop or products produced, however equipment or other security can be used. o Loans for other purposes such as purchasing equipment or foundation livestock are usually secured by the equipment or livestock being purchased but other types of security can be used. All loans need adequate security.

Applying for a Loan  You may obtain the forms for a loan application by visiting your local office or from the FSA website at welcomeAction.do?Home. welcomeAction.do?Home. Your FSA loan officer can provide assistance in completing the FSA forms or can identify other sources of assistance in your area.  You may submit your application by: calling for an appointment with an FSA loan officer; mailing, faxing, or delivering your application to your local FSA office; or electronically submitting your application if you have registered through the e-gov system.

 Are a direct operating loan with a maximum loan amount of $35,000.  Have a shortened application process and reduced paperwork.  Allow some applicants that do not currently meet the experience and managerial requirements to qualify through a self-guided mentorship.

 Provide some flexibility in loan security;  Assist the agricultural community by creating opportunities to start new businesses;  Fulfill financial operating needs of beginning, niche and the smallest of family farm operations.