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Farmers and agricultural land owners operate in a seasonal business. While waiting for the season to start, their high-end specialty equipment is locked away in a barn. That scenario, can however be changed and optimized through a farming loan. In this type of loan, the farmer uses the value of the equipment as collateral to gain funds that can then be deployed into other business uses. Ultimately, the farming loan can thus be distilled as such: a secured loan that enables the established farmer to unlock additional value in the business or the new farmer to initiate his/her business.
While several financial institutions and credit unions offer farming loans, there are some critical factors to consider and evaluate before undertaking a farming loan. When entering into loan negotiations with financial institutions, one of the questions that the borrower will likely be asked are his/her financial goals and ambitions. To this end, it is important to understand the land/facilities availability, as well as the market demand for crops to correctly equate demand and supply capabilities.The ability to match production to demand is what financial institutions are looking for in farmers. An imbalance on either side can be detrimental to the prospects of repayment. Therefore, before entering the room, the farmer should have defined a marketing and sales plan, along with any locked-in contracts for the crops. Larger farms often structure supplier agreements with large retail chains before they expand their farmland. While this option may not be available to the first-time farmer, it is nonetheless important to reach out to smaller chains and attempt to secure interest there. This will ultimately help the borrower gain a better borrowing cost.The financial institution will certainly look into existing net worth, savings and income. Therefore, the borrower would be in the best position to negotiate if he/she can demonstrate an appropriate sources and uses of funds (i.e. what the borrowed money will be used to fund or purchase), balance sheets, income statements, statements of cash flows and precedent credit histories.There are several alternatives to obtaining funding for farming operations. These include: (i) government grants which are subsidies that do not have to be repaid to the government, (ii) government loans, which are low-interest loans designed to encourage farming operations, (iii) micro loans, which are smaller sums of money lent at relatively lower interest rate than financial institutions to help first-time farmers.
It is pertinent at this point to explain what is meant by some of the terms above, particularly for first-time borrowers. 1. Balance sheets are a snapshot of the company’s assets at a given point of time less the liabilities (debts) owed to other counter-parties. The remaining equity is the value of the business left for the owners.2. Income statements are documents which show how much revenue was generated via the farming operations less the expenses that were incurred in generating that revenue. The residual amount is the net profit (or loss if the number is negative).3. Cash flow statements are documents that calculate and show how much cash is in the business at the current point of time.
Farming loans can be used by farmers for a multitude of diverse reasons. Some of these are as detailed below:[bsf-info-box icon="Defaults-tree" icon_size="32" title="Buying Farm Equipment:"]Farms cannot operate without the use of specialized equipment such as tractors.[/bsf-info-box][bsf-info-box icon="Defaults-cogs gears" icon_size="32" title="Purchasing Supplies:"]To buy the raw materials of the crops (i.e. seeds, fertilizer etc.), farmers can use the farming loan.[/bsf-info-box][bsf-info-box icon="Defaults-road" icon_size="32" title="Land Costs:"]While buying land via a loan usually comes with a need to post collateral, making small improvements to the land in the form of maintenance can be funded via farming loans.[/bsf-info-box][bsf-info-box icon="Defaults-refresh" icon_size="32" title="Refinancing:"]Older farming loans can be refinanced with new farming loans if the borrower finds that there is an attractive rate available to him/her on the market[/bsf-info-box][bsf-info-box icon="Defaults-camera" icon_size="32" title="Marketing Campaigns and Advertising:"]To secure new purchase partners, a degree of marketing and advertising often has to be conducted. These often require initial cash outlays, which can be funded via farming loans.[/bsf-info-box][bsf-info-box icon="Defaults-key" icon_size="32" title="Initial Costs:"]Hiring and training people, as well as covering initial bills before revenues start to flow in is important for business continuity. However, the farming loan can assist with this purpose as well.[/bsf-info-box]
The farming loan offers several advantages for borrowers including:1. Lump-sum Payment: At the outset, the farmer receives a lump sum payment to initiate operations with. Over the life of the loan, this payment is then paid back with interest, while the farmer can continue making revenues in the interim.2. Longer Loan Terms: With the longer terms typically offered by the farming loans, farmers reduce their monthly cash outflow, enabling them to retain more cash for themselves from their operations.3. Multi-purpose: As evidenced from the paragraph above, these farming loans can be deployed towards a versatile range of uses, providing the farmer with additional flexibility for how to allocate his/her funds.
There are however, some considerations to be made before undertaking a farming loan. These include:1. Higher Rates: Because of their longer terms and relatively riskier business model, farming loans are priced higher than other commercial loans, all other things equal. This implies higher interest payments over the life of the loan.2. Collateral: If the borrower fails to repay the funds acquired, the lending institution can seize the assets (in this case, the equipment bought) to recoup their losses. For a farmer, this could possibly be a major obstacle to continuing their business.3. Alternative Options: The farming loans are rarely cheaper than other options such as grants, government loans or micro-loans.
The following chart shows the size of the agricultural equipment manufacturing industry in Canada. As can be seen, the industry has stayed largely stable over the past few years, reflecting the consistent demand of farmers to replenish their equipment. Pre-Apply For Farming Loans Here
