Using Agribusiness Loans
for Expanding Farming Business
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Agricultural (AG) loans have become one of the most convenient and accessible funding options for agribusinesses in modern times. In the $1.29 trillion agriculture market, North America is the fastest growing market with a CAGR of 6.6% in the forecast period 2025-2030. Agribusinesses now realize the changing consumer demands and are able to keep up with high ROI yields. Furthermore, the demand for healthier food alternatives, organic products, and adoption of sustainable farming methods have become the lead factor behind the growth in the industry.
Farmers who are lacking behind or unable to catch up with the modern consumer requirements can benefit from agribusiness loans. These loans can be used for a number of purposes including purchasing agriculture equipment, seeds, insecticides, and even setting up granaries. Let us discuss the benefits, purposes, and agribusiness loan options in a little more depth.
What is an agribusiness loan?
Agribusiness loans or AG loans are tailored financial products for supporting agriculture practices. Many small businesses and farming companies can benefit from these loans. From covering large expenses for purchasing farmlands and costly equipment to smaller expenses like purchasing tools, buying seeds, setting up fences, etc. agribusiness loan can be used for all these purposes.
When explored properly, agribusiness owners and farmers can find a range of loan products at competitive interest rates that do not burn cash even during seasonal downfalls. There are also several government-backed agribusiness loan options available that farmers can use to expand operations and fuel business growth.
How to Use an Agribusiness Loan?
According to the United States Department of Agriculture National Agricultural Statistics Service (NASS), 95% of all farms in the US are family-owned farms. In such structures, the producer majorly owns farm operations and earns through gross cash farm income (GCFI). During seasonal downfalls, or delayed seedings, agribusiness owners can use AG lending to overcome uncertainties and stay relevant.
Purchase Producing Inputs
Depending on their farming practice, agribusiness owners can use the loan amount for purchasing high-yield seeds, fertilizers, and pesticides. Many times, returns are gradual in an agri-business, and instead of waiting for yield to be sold, farmers can use agribusiness loans to purchase seeds and get ready for the upcoming season.
Purchase Land
Farmland acquisition costs are steep, ranging between $4000-$8000 per acre from state to state. Agribusiness loans can provide financing options to purchase land in a more convenient way with competitive interest rates and longer loan tenures.
Preparing the Land
For land development purposes, business loans can cover the cost of leveling, clearing, fencing, soil conservation, and even setting up irrigation facilities like wells and drills. They can also hire more workforce to speed up operations and timely prepare the land for farming operations.
Buy Farming Equipment
Farming equipment is costly. Business owners can use an agribusiness farm loan for equipment financing and procure equipment ranging from trucks, tractors, cultivators, and harvesters to ploughs, drills, ranchers, and planters. In equipment financing, business owners can benefit from competitive interest rates.
Support Secondary Income Channels
Along with farming, owners can use agribusiness loans to diversify their revenue with secondary income channels. They can set up poultry farming, set up fisheries, sell dairy products, honey, and even implement vermicomposting practices.
Manage Working Capital
Because of the seasonal nature of business, farmers are expected to have adequate cash management skills. However, just like any other business, economic uncertainties can be unprecedented and come at any time. Farmer loans can help business owners resolve temporary cashflow problems.
Types of Loans Used by Agribusiness Farmers
In the agriculture industry, there are different loan types that business owners can use. However, it is advised to consult professional loan advisors to figure out the right loan option for your unique needs.
SBA Loans
The U.S Small Business Administration (SBA) offers loan programs in collaboration with certified non-profit community financial development institutions (CFDI). Instead of providing direct loans, SBA connects agribusiness owners with lenders and guarantees the loan amount.
Two popular SBA loan options are:
- SBA 504 Loans: Under these loans, agri-entrepreneurs can avail a max loan of up to $50,000 and invest it in soil preparation, seeding, harvesting, ag equipment financing, irrigation, and purchasing various other agricultural products. The loan terms are kept simple under these loans and no collateral is required to secure SBA 504 loans.
- SBA 7(a) Loans: Under these loan programs, the max amount is $5 million. However, because of the thorough due diligence process, loan approval may be longer. Agri-business owners are also required to submit some collateral under these loans.
Farm Service Agency (FSA Loans)
The US Farm Service Agency also provides several direct and guaranteed agricultural lending options. Dedicated to supporting farmer communities, its financial solutions include:
- Farm Ownership Loans: Availed for purchasing or expanding farmlands with the maximum loan amount of $600,000.
- Farm Operating Loans: Short-term loan options for purchasing farming equipment, livestock equipment, and production inputs. The maximum loan amount under these loans is $400,000.
- Microloans: These loan options are designed to fulfill various requirements of small farmers. The maximum loan amount is $50,000.
- Youth Loans: Agribusiness loans for young farmers. The maximum loan amount under these programs is not declared.
- Loan Programs for Native American Tribes: The Farm Service Agency has a dedicated loan program to help tribes purchase lands with tribal registration or within the Alaskan native community.
- Emergency Loans: These loans are offered to farmers to overcome any natural disasters like draughts and floods.
Agricultural Line of Credit
These are farm credit lines issued to farmers by several private lenders and credit unions. Farmers and agribusiness owners can withdraw any amount required to grow and expand their business and repay in convenient monthly payments. With each monthly payment, farmers free up some credit line that can be reused without any repeat applications. AG lending through credit line remains one of the most flexible options. It is based on revolving credit principle, and farmers are only required to pay interest on the amount withdrawn.
Agricultural Equipment Loans
These are secured agribusiness loan options for financing all types of equipment including trucks, tractors, harvesters, and more. As the equipment itself secures the loan, farmers aren't required to keep any collaterals. Their personal and business assets also remain protected in case of defaults. Being a safe option for lenders, the interest rates offered on equipment loans are very competitive. Many lenders also allow lenders to select their preferred loan tenure in ag equipment loans.
Agriculture Real Estate Loans
Farmers can use these roles to invest in more farmland, or even build barns, stables, warehouses, granaries, and other buildings. These remain secured with the real estate property and usually have longer loan tenures. As the investment amount is big, the lending team may require you to submit thorough financial documents to verify your repayment capabilities.
Eligibility Criteria to Secure Agribusiness Loans
Note: The eligibility criteria vary for each lender. The following criteria is only for reference purposes.
01 Credit Score
The higher your credit score, the higher the chances of approval. Lenders usually prefer a credit score above 630.
02 Income Stability
Lenders prefer borrowers who have stable income. This does not need to be from farming business but can be from other revenue generation sources as well.
03 Debt-to-Income (DTI) Ratio
Previous debts may affect your chances of securing agriculture loans. Consider closing previous debts or consolidating them under a single loan.
04 Business Plan
Farmers with a strong business plan, including where they want to sell their produce and generate money, may increase chances of securing agribusiness loans.
05 Downpayment
Having some savings to make a downpayment decreases the risk for lenders and improves your chances.
06 Guarantor or Co-signer
Having a guarantor or co-signer in your loan application again lowers the risk for lenders and may help secure ag industry loans at better terms.
Summing Up
Agribusinesses are evolving in the US, so are their target audiences. With the growing demand for organic produce, farmers now need to be more proactive in implementing new and safe farming practices. Agribusiness loans can provide them with the funding required to give shape to their ideas, produce new crops, purchase land, or acquire new farming equipment. By exploring multiple loan options, farmers may be able to secure a deal that best aligns with their interests.
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FAQs about Agribusiness Loans
1. What are agribusiness loans?
Agribusiness loans help farmers and agribusiness owners get funds for their various needs. They can opt for ag equipment financing loans, ag real estate loans, ag operating loans, farmers’ line of credit, and more.
2. What credit score do I need to get agribusiness loans?
The credit score requirements for every lender. Usually, lenders consider a credit score between 630-749 as good, 749-799 as very good, and 800-850 as excellent. Also note that credit score isn’t the only criteria that lenders evaluate when approving agribusiness loans.
3. Can I purchase tractors with equipment loans?
Tractors count under farming equipment and can be purchased with the help of equipment financing.
4. What downpayment do I need to secure a real estate loan?
The required downpayment is not fixed. Based on your credit profile, lenders may ask you to make a certain amount as downpayment. Get in touch with a loan professional to understand more.
5. Does the government offer ag lending?
There are several independent federal bodies that offer agricultural lending. One of these is the Farm Service Agency. However, loan approvals can be lengthy in government programs. For faster approvals, try to consult private lenders as well.
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