What Kind of Agricultural Loan is Right for You?

Financing options for your new farming operation aren’t one-size-fits-all. “Farm loan” might feel universal term in the industry, but really it represents several types of ag lending products. In production agricultural lending, there are three (and sometimes four) basic loan products for the full-time operator. Here is a primer on farm loan types so you can confidently approach your lender, knowing exactly the loan product you are looking for. 

Real Estate Loan

A real estate loan is used to purchase your actual farm ground and any building or structures associated with the property. Professionals call the land and structures, including houses, barns, and permanent fences, “real property.” Real property also includes any rights associated with that property. In the case of agricultural land, it includes things like water rights, grazing rights, and building permits. 

A real estate loan is considered a long-term loan because the length of the loan is considerable. The typical terms for agricultural real estate loans are either 15-year or 20-year. The one notable exception is the government-sponsored Farm Ownership Loans financed through the FSA (Farm Service Agency). Terms for those loans are 40 years. 

The collateral for a real estate loan needs to be real estate. The security agreement will either be a mortgage or a deed of trust, depending on the property size. Unlike home loans, farm real estate loans will require a significant down payment, often upwards of 40%. Agricultural lenders generally structure the loan repayments to coordinate with the farmer's production cycle. If you are a dairy farmer with a monthly income from the sale of milk, your payments will be monthly. If you are a crop farmer who harvests in September, you will have an annual payment schedule with your payment due in October. 

Farm Operating Loan: 

An operating loan or operating line is another type of loan often categorized under the general term of “farm loan.” Operating loans are used to finance the production of the farm. It is used during the farming season to purchase short-term assets, like seed, feed, fertilizer, labor, and fuel. A farmer may also use their operating loan for family living expenses.

An operating loan is considered a short-term loan with a loan term of 1-3 years. If the farmer meets the loan's obligations, it is generally renewed before the next farming season. On an operating loan, the withdrawal of funds might be controlled and budgeted, meaning the farmer can only make monthly draws in the amount specified by the budget. Or it might have more flexibility allowing draws anytime up the amount of the line. Generally, there are no scheduled payments, though the lender may require monthly interest payments. At the end of the farming season, when the crops or calves are sold, a lender expects a loan to be paid down or paid off before renewal. 

An operating loan will be secured by the farm’s short-term assets, like inventories, feed, calves (or other young stock), receivables, and growing crops. The loan will be secured by a “UCC” filed with the state the farmer is operating in. A UCC gives the lender the first claim on those assets in case of a loan default. Generally, when a lender has filed a UCC, they “get paid first.” Meaning when a farmer sells calves at a livestock sale or grain at an elevator, the check will be written to the lender who holds the UCC to pay down the balance of your operating loan. Operating lines are occasionally unsecured if the farmer is financially very strong or the maximum on the loan request is small compared to the gross sales of the operation.

Intermediate-Term Loan: 

An intermediate-term loan is a general way to describe loans with 3-10 year terms. In practice, lenders might call the loans different things, but they operate similarly. While real estate loans purchase long-term assets, like farm ground, and operating loans are used to finance short-term assets like inputs, intermediate-term loans go to purchase – you guessed it—intermediate-term assets, like breeding livestock and equipment. The expected life of the assets should match up with the loan term. 

Repayment of an intermediate-term loan will be most like a real estate loan and will be amortized over the loan period, 3, 5, or 7 years. The principal and interest payments will match the farmer's production schedule, whether monthly or annually. The security for the loan will be the asset the loan will purchase, like a tractor, for example, or it might be all the equipment itemized by the borrower. 

Bonus Type of Farm Loan— Ag Equity Line of Credit: 

An ag equity line of credit (AELOC) is a line of credit, like an operating loan, that is secured, rather than by inventories, by real estate with a mortgage. Security is the equity in your farm ground. Because of the strength of the security, these loans are often less scrutinized by a lender compared to an operating loan. 

Find a Lender that Fits your Needs 

Now that you are familiar with the loan products start looking for an agricultural lender that meets your needs. Not all lenders offer all possible loan products, so do your homework and find one that fits your needs—if that be the FSA, Farm Credit System, a commercial lender, or a digital lender.  

Ready to find your lender? Check out this article on Agricultural Lending: Which Bank is Best?