At some point in the life of every successful business, there is a need to borrow money. Farms and ranches are no different. For some, startup capital might be needed to buy new land or equipment or to purchase breeding stock.
For others, short-term loans are necessary to cover the costs of seasonal increases in labor or to make repairs on old machinery. Larger, long-term loans are often required to invest in a business for expanding operations, upgrading technology, updating aging rural properties, or even to refinance or consolidate existing loans.
Fortunately, the federal government and many private US banks offer all types of ag loans to meet the needs of ranchers and farmers.
Agricultural enterprises of all types have unique borrowing needs, so a variety of flexible financing options are available for ranches and farms. These options include everything from government-funded grants and
microloans to loans with flexible interest rates and payment schedules that match seasonal increases and decreases in cash flow.
Moreover, many private banks that specialize in ag loans and rural communities work alongside government agencies to augment and enhance loans and grants directed towards rural development projects. Below are just a few of the types of ag loans that are available.
Financing for Medium-Term and Long-Term Needs
Medium-term and long-term loans are designed to meet farmers’ and ranchers’ long-term goals and plans for growth. The maturities of these types of ag loans vary based on the needs and objectives of the specific industry that is borrowing the money. Additionally, interest rates for these loans will vary according to the venture.
For agriculture-based businesses looking to grow their operations and increase profits, medium-term and long-term loans are quite suitable. For example, a growing dairy farm may need to increase the size of its milking facilities or update its equipment; a medium-term loan would be required for this expansion, to be paid off gradually over time as profits increase.
These ag loans may also be used to buy more equipment or large pieces of land to expand a successful operation. For larger, corporate farmers, medium-term and long-term loans are useful for financing existing working capital, long-term assets, as well as mergers and acquisitions.
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Seasonal loans are another type of short-term ag loan. These types of loans typically mature within 18 months, and are intended to meet seasonal needs. They may be used to finance seasonal assets. Seasonal assets include equipment such as harvest bins and plows that are only used part of the year, but which sit idle the rest of the year.
Another common type of seasonal loan is called an inventory loan, and these are used to finance inventory when it’s at its highest. Seasonal ag loans are also used to cover other short-term needs such as commodities and accounts receivable.
For private banks, once farmers or ranchers become established borrowers, they may take out and maintain lines of credit to finance other seasonal needs such as inventory loans and financing for operating capital.
Inventory loans are used to finance items such a seed, fertilizer, and pesticides, or equipment needs that increase at certain times of year like new tires for farm vehicles or lubricant for machinery. Lastly, there are asset-based seasonal loans. Asset-based loans are the most flexible type of loan because they can be adapted to suit a range of purposes, such as meeting periodic shortfalls in cash flow or to cover other immediate cash needs that may arise from unexpected situations.
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Rural Development: Streamlined Refinancing Program
Many banks offer ag loans that work alongside financing from the US Department of Agriculture, or USDA. The USDA offers multiple types of support to farmers and ranchers, and its programs are far-reaching.
The USDA’s projects include innovation and incorporating the latest technology into US farms, environmental protection programs that aim to safeguard water supplies and arable land, and startup funds for beginner farmers, minorities, and young people who are getting into the agriculture business.
One important program of the USDA is the Rural Utilities Service Water and Environmental Programs, also known as WEP. WEP offers support to rural communities by encouraging farmers and ranchers to construct and maintain facilities for safe wastewater disposal and drinking water systems.
This support is in the form of both financing and providing the needed technical assistance. Access to safe drinking water and the safe disposal of wastewater are both crucial to the quality of life in rural areas, and in the long-term, these projects support the economic success and growth of rural communities.
Many banks work alongside the USDA to help farmers and ranchers involved in WEP projects to create wastewater disposal and drinking water infrastructure by offering many advantages to refinancing their USDA
ag loans. Currently, interest rates are at an all-time low, and agricultural businesses may benefit from this, although it should be noted that there are daily fluctuations in interest rates based on market conditions.
Additionally, the loan application packet for water infrastructure projects has been simplified, and the approval and closing processes to refinance WEP loans have been streamlined, which simplifies the lending process and makes it move along faster and with less hassle than with other types of loans.
Finally, loan programs working in conjunction with WEP have a lot of flexibility in terms of how they are structured, which means that payments are often reduced and maturity can be shortened.
Agricultural Export Support
Farm products and commodities make up a significant portion of US exports. Livestock products, feed and grains, soy products, and horticultural products such as nuts and vegetables are the leading American products for export.
While a majority of these exports go to Canada and Latin America, US farm and ranch products are purchased and consumed all over the world. A robust American agriculture is essential to the health of the US and world economy. For this reason, the federal government and private banks support farmers and ranchers looking to become involved in exporting their products internationally.
Many private banks are participants in the USDA’s Commodity Credit Corporation, which fosters export of American farm and ranch products by guaranteeing export loans. These banks also maintain relationships with international lenders and export organizations such as the Export-Import Bank of the United States and the World Bank.
Bank financing also includes direct funding through trade credit and indirect support from various insurance programs. In addition to this, many banks that specialize in agricultural financing work closely with broad networks of international banks, which allows them to assist farmers in a variety of ways such as letters of credit, risk mitigation, and loan syndications.
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With the tremendous variety of borrowing options available to every type of farmer or rancher through the US government, private banks, or both, locating the right ag loan that works best for any situation or business plan is essential to the growth of all agricultural enterprises.
Whether a loan is small or large, short-term or long-term, local or international, or privately or federally funded, farmers and ranchers have a range of options available to them to access the financing for everything needed to grow a business and increase production and profits.
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