How Agriculture Operating Loans Can Help Farmers Expand and Grow Their Businesses

What Are Agriculture Operating Loans?

Agriculture operating loans are a specific type of financing that provides working capital to eligible farmers and ranchers. Farmers famously work in seasonal cycles, which can create cash flow challenges between planting and harvesting.

As a financing tool, these loans allow farmers to continue making necessary operating expenses without draining working capital. Expenses and revenue may come in different seasons, and agriculture operating loans can cover any gaps.

Depending on the lender and borrower, these loans may be structured as a term loan or a line of credit. As a result, how funds are distributed and repaid can be different as well. An ag operating line of credit tends to be more flexible and may allow you to repay after the harvest.

How Farmers Can Use Agriculture Operating Loans to Grow

If you’re a farmer, you can use agriculture operating loans to help support growth. Beyond buying or selling crops or livestock, these funds can be used for a range of purposes that increase capacity.  Below we cover some ways that both farmers and ranchers can utilize these funds to expand.

1. Make Necessary Purchases

As a farmer, you can use agriculture operating loans to make necessary purchases. For example, inputs such as seed, feed, fertilizer, fuel, and more. The funds help facilitate these purchases without depleting all available cash.

2. Increase Production

One of the major issues with farming is that the expenses can add up fast before the revenue comes in. Agriculture operating loans help you increase production by covering additional expenses for labor, supplies, and feed.

Having the funds to cover costs can increase output. Though financing can help, it’s key to evaluate potential revenue increases against total borrowing costs.

3. Expand Distribution

Revenue might not just come from more sales of crops and livestock. Revenue can come from reaching new markets and customers as well. Having your working capital covered can provide the freedom to expand distribution and pay for associated costs. For example, this may include transportation, packaging, storage, and logistics.

4. Labor

To grow your farm, you may need more hired hands. But labor comes with more expenses like payroll. Agriculture operating loans maintain working capital, which may help cover costs for seasonal workers or additional employees. Before taking on any debt, include potential costs in cash-flow projections.

How Agricultural Business Loans Help Cash Flow

Agriculture businesses typically have uneven cash flow patterns because the timing of expenses doesn’t always align with the revenue. Getting agriculture loans for operating expenses can help in the following ways.

1. Manage Seasonal Cash Flow

During production and planting periods, you may have a substantial increase in expenses. While that happens, any revenue might be delayed until harvesting or when you can sell crops or livestock.

Operating financing helps you manage seasonal cash flow when your expenses outpace your revenue. When determining how much you might need, consider these seasonal fluctuations.

2. Bridge Gaps Between Revenue and Expenses

As a farmer, you might pay for seed, fertilizer, and labor upfront to prepare for production. You have these expenses before you earn any revenue from the harvest.

Agriculture operating loans can effectively bridge that gap. That means you can continue operations as normal without waiting for future revenue to come in.

3. Maintain Access to Funds for Unexpected Costs

If there’s one thing that can drain working capital quickly, it’s unexpected costs. As a farmer, you might have a key piece of equipment that needs essential repairs. You might face weather-related expenses or losses that are out of your control.

In these cases, having access to financing can help you cover unexpected costs and lessen the financial blow. Maintaining access to emergency funds, when possible, can help alleviate financial stress and deal with surprises down the line.

4. Different Repayment Terms

Agricultural financing can have unique repayment structures, depending on the loan and lender. Some options align repayment with the harvest, after the revenue comes in. For seasonal businesses like farming, this can be a major benefit.

When researching options, it’s crucial to understand the repayment term and payment frequency.

5. Preserve Working Capital During Growth Periods

If you’re a farmer expanding operations, you need to invest money upfront. That can negatively impact your cash flow and put you in a tight position. During significant periods of growth, it’s possible to use financing to preserve working capital.

Where to Get Agriculture Operating Loans

If you’re interested in agriculture operating loans, you can access financing from various sources. Each option has different eligibility requirements, underwriting criteria, interest rates, loan amounts, repayment terms, and funding speed.

1. Government-Backed Farm Operating Loans

The U.S. Department of Agriculture’s Farm Service Agency offers farm operating loans to eligible applicants. Loan funds may be used for the normal input expenses such as seed and feed, but also family living expenses, crop insurance, and minor improvements.

You can get Direct Loans, which come directly from the agency and reach up to  $400,000. Guaranteed Loans are guaranteed by the FSA for a much higher amount that adjusts based on inflation but are disbursed from commercial lenders.

Eligibility and loan purpose vary depending on the specific program. For example, the USDA Farm Service Agency also offers Farm Ownership Loans, which have different uses, requirements, and loan amounts.

2. Financing from Specialty Lenders

You can also secure farm operating loans from specialty lenders with expertise in agriculture and offer lending products designed for farmers.

These lenders may have years of experience in the industry and provide financing options catered to the unique cash flow challenges that farmers and ranchers face. While you want to work with a lender that understands what you do, it still pays to shop around to ensure you’re finding the best financing option for your particular situation.

3. Online Lenders and Financial Institutions

Aside from government-backed loans or specialty lenders, you can also get agriculture operating loans from online lenders and financial institutions.

Banks and credit unions may offer certain types of financing and have specific eligibility requirements you must meet. You may already have an online banking or credit union relationship, which could be a place to start if you want to foster that connection.

Online lenders tend to prioritize efficiency, offering a fast and streamlined application, approval, and funding process. They may also work with different types of borrowers and have more flexible eligibility requirements. However, they often lack in-person support.

Understanding Repayment and Total Costs

Regardless of where you get a loan from, it’s key to understand how repayment works and the total cost of borrowing. While many borrowers focus on the APR, it’s important to consider:

• Origination fees
• Administrative fees
• Payment amount
• Repayment schedule
• Collateral requirements

Understanding the true cost can help you evaluate offers. Before applying, review projected cash flow, and understand how financing will support your overall business plan.

You want to find a happy medium and get financing to help you sustainably grow. You also want to avoid creating a huge debt burden that makes your financial situation worse.

Final Thoughts

Agriculture operating loans offer working capital to farmers and ranchers. During the off-season cycles, this funding can help maintain cash flow or help you grow. These funds can help pay for necessary purchases, labor, or expansion-related costs.

Borrowing strategically can help you invest in your business, which may support long-term profitability. To ensure it’s a smart move, research lenders, rates, industry experience, customer ratings, and understand how the repayment schedule will impact you as a borrower.