If you’re looking for business loans to start a farm, we don’t need to tell you that farming is a tough business. Not only is it capital intensive, but markets for certain products swing often, which can be tough for all of the hard work you put in. Because farming is nothing if not honest, hard work—with a lot of reward, of course.
But back to capital. You need money to make a farm run, and run well: Things including purchasing large equipment and livestock, and upgrading your technology are all expensive and can often require farm financing to make ends meet. Here, we’ll go through a few of the top options for farm business loans, so you can make an informed decision on how to best finance your farm.
Regardless of whether you’re in poultry farming, dairy farming, or even vegan farming (yes, really!), there’s a small business loan that’s the right fit for you.
According to the USDA, farming is going strong. But it can be tough to make a strong, consistent living sometimes; statistics show that more than half of U.S. farms are deemed “very small” and only generate about $10,000 of revenue. The median income for larger farmers was at about $75,000 per household. That’s certainly nothing to sneeze at—but revenue on the lower side, as well as often unpredictable earnings due to factors often out of your control, can be scary for lenders who are looking for surefire bets.
Additionally, farming is a highly seasonal business. That doesn’t mean you don’t work around the clock, but it does mean that your revenues are likely inconsistent from season to season, depending on your business. Even if you operate a farm that yields year-round, demand is seasonal.
With those things in mind, it’s important to take the farm business loan provider’s point of view to understand how they’ll see your loan application.
First and foremost, lenders are looking to work with the least risky candidates possible. Their job is to get their money back, and they do that by getting their loans repaid with interest. They don’t do their job if a client defaults on a loan, which is why they must be choosy about whom they lend to. That’s why your credit score is very important: It tells the story of your responsibility with loans, whether farm financing or just your business credit card.
Many lenders also have requirements for minimum revenue or time in business, which can be tough if you’re looking for farm financing to help you recover from a down year, or looking for a loan to start a farm. This doesn’t mean you’re out, but you should keep these requirements in mind, and know your credit score, as you start the process to apply for a business loan.
The most important thing to remember as you’re reading through this list is that each farm financing option has a slightly different purpose. You’ll want to understand exactly how you’re hoping to use the money as well as what you can afford as you narrow down your search.
If you’re looking to supplement your purchasing with some financing here and there, you might want to consider a business line of credit.
Think of a business line of credit like a traditional term loan mixed with a credit card advance cash. You apply for a business line of credit the same way you would a traditional loan via a lender, who has certain requirements for qualification. Then, after you gain approval, you can withdraw as much money as you’d like up to the maximum of your line of credit.
Most importantly, you only pay an interest on the amount you use (unlike lump-sum loans, on which you owe full interest no matter what). In addition, many lines of credit are known as “revolving,” which means they are re-upped for reuse once you repay them.
These loans are excellent for emergencies, like replacing the roof or redoing your irrigation, but also for seizing opportunities, like if you had a one-time chance to buy more land and needed to come up with quick money.
To get your farm up and running with the right supplies, a huge capital outlay is needed (not to mention additional money to replace equipment it if anything goes down).
If you’re specifically looking to purchase fixed assets, you’ll find equipment financing extremely helpful. With this type of small business loan for farmers, you’ll supply a lender a quote for the equipment you’d like to buy (you could include tractors or rakes—doesn’t matter!), and a lender will supply you with a large portion of the cost. Then, you’ll repay your loan, which lasts over the course of the equipment’s lifetime.
In contrast to other types of business loans, equipment financing is what is known as a “self-secured loan.” This means that the asset you finance serves as a guarantee for the loan. (And, the more valuable the asset on the liquidation market, the higher the possibility that your loan interest could be lower.) For those without the perfect credit, or who want to reduce their guarantee, this built-in collateral can be especially helpful.
Term loans are what you think of when you imagine “traditional” business loans. A major pro is that you can use them as flexible working capital, and you don’t always need a spotless credit history to qualify.
An additional general benefit of term loan is that different lenders have varying repayment structures, so if you’re interested in making monthly payments instead of weekly payments, for instance, you could find a lender willing to work with you. Loan terms will vary between less than a year (short-term loan, more expensive) and up to five years (medium-term loan, less expensive).
Many lenders look for a couple of years in business to evaluate qualified candidates, but some lenders are more flexible if you’ve had a strong, consistent period of revenue and a strong credit score, too. After receiving approval from a lender on your term loan, you receive a lump sum deposited into your business bank account.
The right credit card is far more powerful than most small business owners realize. If you’re just starting out, and don’t have the credit history or revenue that lenders want to see, what can be specifically helpful to you is a 0% introductory APR business credit card.
You can use this type of business credit card for any type of spending (up to your credit limit, of course) without paying interest on your balance for a predetermined period. That’s good news for farmers who need financing to start a farm, because you won’t owe anything on the card for usually one or more years.
Savvy farmers often use these credit card like interest-free loans, and use them to spend on supplies or even large purchases on their credit lines, taking their time to pay off their balance. And this buying power is instantaneous upon approval. You may also choose to transfer the current balance of your business credit card to prevent your existing debt from accruing more interest.
Depending on how quickly you need money—and assuming that answer is “I can wait”—you may want to do a deep-dive into agricultural loans and grants.
The USDA and FSA have several programs to specifically help farmers. Many of these loans are tailored to develop rural communities, and some are loans to start a farm. Additionally, some programs are specifically set up to help lower-income farmers prosper. Like an SBA loan, which is backed by the US Small Business Administration, USDA loans often come with not only money, but additional resources (such as farm insurance) to help agriculture-based businesses expand in many ways. Some of these sources of capital are also highly flexible, whether you’re looking to build a new barn or swap out your whole force of milking machines. They’re designed for farmers who can’t get traditional loans from a bank—which, don’t worry, a substantial number of businesspeople can’t, either.
Similarly, if you have a lot of patience and maybe a little luck, too, you can apply for several grants specifically created for farmers and those in rural communities. In general, small business grants take quite a bit of work to apply for, but they’re the best kind of funding you can get since they’re interest free.
The USDA’s Agricultural Marketing Service establishes many of these grants, so take a look through. Even if you need a loan fast this time around, you may still find a grant you want to apply for later on down the line.
The good news is that there are quite a few different options for loans to start a farm, or general small business loans for farmers. Before you kick off your search, make sure you know your finances extremely well, including your business credit score, your bank balances, and any outstanding debts. These will all go into a lender’s decision on whether you can qualify for a loan.
A final tip: Since farming is seasonal, consider applying at the end of your peak season. This may sound counterintuitive since you’ll have all of the money you need, but you’ll appear at your strongest financial position to a lender (what they want to see), and ensure you have money through the long offseason.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.