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Farm Loans: What You Need to Know

2/23/2021
Tractor tilling field

Farmers are unique compared to other business owners. Here's what you need to know when looking to obtain credit. 

Key Takeaways:

  • Farmers should articulate their cash flow and income schedule to their lender to help them understand their financial situation better.
  • Good record keeping can help the farmer and the lender work together. 
  • Planning major financial decisions and articulating how they will benefit your operation can help the lender understand the big picture with you.
  • Farmers have a unique business structure; therefore, they need a lender that understands them and their daily life. Farm Credit's mission is to support these businesses.

Obtaining Credit for the Farmer

If you own your own business and are self-employed, you are among millions of Americans who rely on themselves rather than an employer for income. This is nothing new to those in agriculture, where the majority of farmers own and manage their own operations. The farmer is the president, secretary, treasurer and janitor all in one.  For the self-employed, income may fluctuate from year-to-year or even month-to-month.  This is particularly true for American farmers, who must manage several variables in their operations, including input costs, weather and crop prices.

Inevitability, farmers will need to borrow money, either for their operations or personally. Whether borrowing operating money for the season, financing equipment or even purchasing a home, it is important to understand the process. Knowing how your lender looks at a loan request for the self-employed and what information is needed can make the process of getting your loan approved quicker and more efficient.

Understand What Lenders Look At

For those who are employees and receive regular salaried income, lenders will request W-2s, paystubs and perhaps tax returns.  The lender wants to see that the regular income is consistent, steady and sufficient to repay the loan requested, as well as any other debts, with an adequate margin. 

For farmers, however, income is anything but regular. Depending on the crop or commodity, farmers may receive income once or twice a year.  Further complicating matters is that crop cycles often split a tax fiscal year. For lenders that rely on using income to determine loan repayment ability, these cash flow cycles and tax year differences can be difficult to understand. Being able to articulate to your lender how and when income is received will help explain the nature of your operation and how the loan will be repaid. 

Record Keeping is Important

If you’re a farmer with an irregular cash flow, the very best thing to do is have excellent financial records.  This not only helps with understanding the operation and making key decisions, it also greatly simplifies the process of borrowing money.  Tax returns are based on actual income and expenses in a given fiscal year.  Often crops are sold in a different year than expenses are incurred. For the lender determining loan repayment ability, tax returns may not accurately portray the profitability of an operation and may even understate the strength of the borrower. 

Good accrual-based farm records - that is, farm income and expenses based on the crop cycle - can clarify the true nature of the operation and aid the lender in discerning repayment ability.  Farm records should include the income for the crop year and supporting details such as products produced, acres planted, yields and sales prices. Expenses related to each crop should be tracked as well. This data will allow the lender to understand the cash flow and profitability of a given crop year, not tax year.  The net farm income from the crop year is the money that will pay the requested loan.  Having accurate figures will aid the lender in the credit decision and increase the likelihood and speed of an approval. 

[Read More: Record Keeping Can Make Your Farm Successful Now]

Plan Major Credit Decisions

Borrowing needs can arise quickly, such in the case of damaged equipment or the need for additional operating money.  Many times in the case of equipment replacement, real estate acquisitions, farm improvements or other capital expenditures, the need for a loan is known well in advance.  Planning for these needs and meeting with the lender early in the process will make for a much smoother transaction. 

Prepare for the loan request with information regarding the credit need and how it will impact your business.  Only farmers truly understand their operations from top-to-bottom.  A farmer may know that a new tractor will be more efficient and spray in half the time of the old one, reducing labor and fuel costs.  Be sure to explain this to your lender and the benefit to your farm.  The purchase of new land may bring in additional land that can be planted. This transaction could increase the farm plan, reduce rented acres or allow diversification into a new commodity. Being able to articulate to the lender the benefit of and need for the loan will increase the ease of approval. 

Find a Lender that Understands Agriculture 

Lastly, and perhaps most important, is to find a lender that understands the unique nature of agricultural lending.  For farmers, a land loan payment due every month will not work with their cash flows. Farming can have years of highs and lows. Farmers make their livelihoods on their farms and absolutely need a lender committed to them for the long term, a lender to work with them in a drought year and help them grow when a bumper crop comes in. A lender that is not committed to agricultural financing for the long haul can be a detriment to farmers, leaving them scrambling for a new source of financing in a difficult year. 

In many areas of the Southeast, agriculture is the primary industry and banks are adept and committed to supporting farmers. AgSouth Farm Credit and the many other Farm Credit associations that cover the Southeast exist to serve farmers.  As a cooperative owned by the borrowers, the purpose of Farm Credit is to meet the agricultural and rural financing needs of America.  With “Farm Credit” in the name, you can trust that this network of lenders across the United States is committed to meeting the long-term needs of farmers, and has been so for more than a century.

Questions?

If you’re interested in a land or farm loan in South Carolina or Georgia, one of our local loan officers would be more than happy to help. Find an AgSouth Branch near you!

Not in South Carolina or Georgia? Find your Farm Credit Association.