Although farm management has changed over the years, one thing has remained constant: It takes money to run a successful agricultural business. Whether it’s buying new land or purchasing different equipment, things can really add up.
That’s where Agriculture loans (ag loans) come in handy. This type of financial help gives farmers the capacity to purchase necessary items and make decisions without worrying about paying for the items in full. But, there’s a lot to think about when getting an agricultural loan, including the type of loan, what’s needed to qualify and what the money can be used for.
Ready to dig deeper into the nitty gritty details of ag loans? Let’s get started.
What’s an Ag Loan?
First and foremost, an ag loan allows farming professionals to borrow money to purchase things related to running their business. Ag loans can be broken into two different categories: Operating lines of credit and straight-term loans. Because the world of agriculture is constantly fluctuating and interest rates are ever-changing — impacting the prices of goods and services — this financial loan type is generally subject to an annual review. This helps farmers evaluate what their needs are in relation to the changing prices and gross profit.
One key thing to note is that ag loans are generally paid off annually rather than monthly — depending on the style of loan — which gives them enough time to sell the crops, livestock or any other commodities that people purchase from their business.
What To Use an Ag Loan for?
This type of loan can be used for many different items or labor, including:
- Breeder livestock.
- Farm real estate improvements.
Every farm is very different from the next, meaning that what farmers need to purchase doesn’t necessarily fit into a one-size-fits-all box. Ag loans make it easy to personalize services to ensure every ag producer gets what they require.
Types of Ag Loans
Customize your agricuture loan depending on your specific needs by better understanding what’s available to you — and there are a lot of options. Here are a few of the most common types of farm loans and financing options you can choose from:
Operating Line of Credit
Operating lines of credit are very versatile and allow farmers to purchase livestock, seed and feed. This style of financing is like a credit card payment where you purchase something and then pay it off. Then, at the end of every year — once that operating line of credit is paid off — you can start a new one. The interest rate for an operating line is based on the Wall Street Journal Prime, meaning it can change over time.
Equipment loans can be used on anything considered an intermediate asset, like a tractor. This style of loan is short-term and generally paid back on a three to five-year plan. Also, for the entire life of the loan, you’ll receive a fixed interest rate.
Ag Real Estate Loans
Ag real estate loans are similar to equipment loans but used specifically for things like farmland, an acreage or a building site. Usually, this style of financing is turned out over 25 to 30 years and put on a five-year fixed balloon, making the interest rate fixed for five years.
A construction loan is like an operating line of credit, but it’s strictly used for any new builds, like a new hog building or chicken coop. Generally, a construction loan is set for a 12 to 18-month period where a farmer can pay it down and borrow it back again. Then, once the construction is complete, you can put it into permanent financing under an ag real estate loan to be termed out and paid on a monthly basis.
The lending amount that farmers can receive depends on their cash flow, repayment capacity, amount of need and the type of loan that they’re applying for. If you’re unsure what type of loan is best for you, our team is always available to help you make the right decision.
What Do You Need To Get an Ag Loan?
When going through a bank to receive a loan, there are some things that you’ll need to bring with you. In order to have these documents readily available, farmers must keep in mind that detailed documentation is critical for an efficient and fast application process. Like any loan, the bank has to know that you have a solid plan for paying back the money.
Here are some records that you might need to have on hand:
- Tax returns.
- Last year’s crop details, including:
- Overview of plants.
- Crop yield and yield history.
- Total income.
- Income delays.
- Financial statements.
- Schedule F.
- Detailed loan information, including the terms and payment history from the previous year (if you took out loans during the year prior).
- Budget for the upcoming year, including
- Planned production, acres and yields.
- Farm marketing plan.
- Anticipated inputs.
- Balance sheet, including:
- Accounts receivable.
- Accounts payable.
- Buildings, machines and other listed assets.
- Grain and livestock inventory.
- Blueprint (if applying for a construction loan).
Now, before you get overwhelmed by the sheer number of potential documents that you may need to present to the banker, remember that this information doesn’t have to be collected or documented all at once. Take your time and ensure that each of these data points is accurate and up to date before going to get an application.
Benefits of an Ag Loan
It might go without saying that any financial help is nice when running an ag business, but there’s so much more than meets the eye when it comes to this type of financial loan. The main benefit of an agriculture loan is the ability for farmers to invest in the areas that will improve their profitability for the next year, and for years to come. Without financial assistance, you may only be able to think about the next few months ahead — but with an agricultural loan, you can invest in the future of your farm and make decisions that will set you and your family up for long-term success.
To discover the ways farm loans can benefit your business, and to go through the loan application process smoothly, contact Bank Midwest. We have the knowledge and understanding of agricultural business, and we can get you on the right path.