Financing Options for the Beginning Farmer
Starting as a farmer can be an exciting - yet daunting - experience. In addition to understanding the basics of land management and crop husbandry, new farmers must also understand the complexities of financing their operations.
It’s not easy to start in agriculture – the barriers to entry are large and almost entirely financial. New farmers need to access enough capital to purchase land, equipment, and livestock before they can even begin farming, and those things don’t come cheap. Yet, several financing options are available to beginning farmers to reduce the financial burden of starting a farm.
Financing the Beginning Farmer
Personal Investment and Savings
One of the most reliable ways to finance your farm is to use your investments or savings. Using your savings to finance your farm can minimize the interest you pay on loans. When you work independently to develop your farm without borrowing capital, you can have complete control over your operations and allow yourself more flexibility. However, it's essential to plan and budget accordingly to avoid running out of money. Even if you do choose to finance your farm, you will need to have some “skin in the game.” Lenders will require capital, sometimes upwards to 40% - so plan early and save.
Government-Backed Farm Loans
The United State Department of Agriculture (USDA) has various options for beginner farmers, including Farm Service Agency (FSA) Loans and the Beginning Farmers and Ranchers (BFR) Loan program. These loans are typically reserved for farmers with opportunities to acquire or work on agricultural land, pay operating expenses, or purchase equipment. These loans usually have lower interest rates and longer repayment than traditional agricultural loans. The FSA also offers support to help farmers with financial management and production. An FSA or BFR loan can help you obtain the funds required to support and grow your farm. However, qualifying for these loans can take a lot of work, starting with a lengthy (29-page) application.
Microloans are another government-backed loan offered through the USDA or the Small Business Administration (SBA). They are designed to assist small business owners, including farmers. Microloans have lower loan limits (up to $50,000), low-interest rates, and flexible payment schedules. However, these loans usually need collateral and a strong credit rating. Microloans are ideal for beginner farmers who don't have much experience with complicated financing options.
Traditional Ag Lenders
Traditional ag lenders, like the Farm Credit System, community banks, and many national banks, can be great options for new, beginning farmers – if you meet their lending guidelines. Traditional ag lenders tend to have strict underwriting and high down payment requirements, making it difficult to get approved even for seasoned farmers, let alone new beginning farmers. However, some banks, including many in the Farm Credit System, have specialized lending programs for Young and Beginning Farmers. These programs have more lenient underwriting compared to their legacy loan products. Additionally, these programs often include educational programs and business management tools for beginning farmers.
Digital Lending for Agriculture
Digital or online lenders like Bankbarn are new entrants into the agricultural lending space. They offer quick online applications and approvals, making it easier for farmers to access financing. Because their approval process relies on a range of data analytics rather than just financial analysis, they are often more flexible loan approvals – making it easy for new farmers to get approved. However, it’s important to do your due diligence when dealing with online lenders. Ensure that the lender is reputable and that you are comfortable with their loan terms and conditions.
Crowdfunding Platforms
Crowdfunding platforms are an innovative way to raise funds for agriculture businesses. Crowdfunding has become widespread in recent years for projects, businesses, and charities due to its simple and easy application process and wide range of options available. Crowdfunding raises funds by requesting small amounts from numerous people. When combined with social media, crowdfunding may attract people interested in supporting a particular cause and profoundly impacted by your story. However, to succeed in crowdfunding, especially to support a for-profit business, you need a compelling story that attracts attention and serves a range of people.
Supporting Young and Beginning Farmers
In the US, 25% of all farmers are young or beginning farmers. They produce about one-fifth of the national agricultural output. Agricultural businesses are a fundamental component of our economy, and supporting the next generation of farmers is important to maintain a plentiful and safe food supply.
If you are considering starting a farm, learn more about the available financing opportunities. With some research, you can find several types of loans, assistance programs, and funding options to help run your farm successfully. Whether you pursue loans from government agencies or bank financing, it is essential to plan accordingly, protect your finances, and consult financial experts if you need help determining which financing route is right for you.
If you want to learn more financing options for farmers and ranchers, check out this article: Agricultural Lending: Which Bank is Best?
