Owning a farm works much the same way as owning a house, if you need money to finance the farm, you need a mortgage. The mortgage in this sense is a farm loan. There are two types available, direct and guaranteed. Understanding the difference between the two loans will help you make the right choice for your situation.
Direct Farm Financing
Direct farm financing is offered by the Farm Service Agency, a branch of the USDA. It is a standard loan to purchase a farm that does not have a minimum amount, but the maximum allowed amount of the loan is $300,000. Like many other government programs to purchase a home, there is no down payment required for direct farm financing. One of the stipulations for the loan is that you have experience in farming; in particular, you must have worked on a farm for the last 3 years in order to be eligible. The FSA is also required to provide farmers with counseling regarding what they can afford not only in building, but also in equipment and machinery. The term of the loan cannot exceed 40 years and the interest rate will always be fixed.
Guaranteed Farm Financing
Guaranteed farm financing works much the same as residential guaranteed financing. Farm financing is guaranteed by the FSA. The financing does not come from the FSA, though, it comes an agricultural lender. That lender then goes to the FSA for a guarantee on the loan. The guarantee provided by the FSA makes it easier for lenders to bend their requirements slightly, giving loans to farmers that would otherwise be unable to secure financing for the farm. The maximum loan amount under guaranteed farm financing is based on the rate of inflation at the time of the application. The term for this loan can go up to 40 years and the rate is usually fixed but is variable based on what the lender has to offer.
Helping First Time Farmers
One of the greatest aspects of the FSA is the fact that they set aside a portion of their budget every year to help first-time farmers. This is how they gained the name “Lender of First Opportunity.” The funds offered in this program are for farmers either just starting out or those that are socially disadvantaged. The FSA classifies beginning farmers as those that have been farming for fewer than 10 years or are in a minority classification.
Finance Business Plan for Farms
In order to obtain any type of farm financing, you will have to come up with a business plan. This plan helps the lender see what you plan for your future to ensure that you will be able to continue to afford to pay the loan back.
Your business plan must include:
- The mission for your farm
- The amount of assets you currently own
- What your farm will do including what it will provide
- How you plan to market the goods your farm produces
- How the income your farm produces will cover your expenses
The FSA offers many opportunities for farmers to finance their farm. They also offer counseling for those that are not sure what they can afford or what they are getting themselves into. They are a great resource to help you finance your farm as well as stay within your desired budget. If you need assistance, the FSA is there to help you figure out your needs and how to meet them. Whether you need a direct or guaranteed loan, there are many options available for farmers with many different statuses.