How to Use Farm Operating Loans to Manage Seasonal Cash Flow

Key Takeaways:

• Farmers face inconsistent revenue and have a seasonal-based business, which can make managing cash flow a challenge.

• Farm operating loans can provide a source of capital to fill in gaps.
• Lenders, terms, and loan structure can vary.

Farming can be a profession and a calling that brings you rewards and  fulfillment. You  reap what you sow as farming may supports others in your community. . But as a business, it can be full of challenges. One of the primary pain points are the expenses year-round.

To reduce some financial pressure and get through the slower periods, farm operating loans can help. Read on to learn more about farm operating financing, how it works, and how to use it to manage seasonal cash flow.

How Farm Operating Loans Work and Can Help

Farm operating loans provide capital to farmers and are used to help cover working capital and day-to-day expenses. When farmers are in an off-season and income is reduced, these loans can be a lifeline to stabilize cash flow.

Plus, they can be used for necessary purchases now, so you don’t have to delay because money is tight. Essentially, they help farmers stay on schedule and remain agile and efficient.

What Can You Use Farm Operating Loans For?

Farm operating loans can be used for common operating expenses, including:

• Feed
• Fertilizer
• Farm equipment
• Seed
• Supplies
• Livestock
• Family living expenses
• Fuel
• Insurance
• Poultry
• Chemicals
• Labor costs
• Repairs

The versatility of these loans makes them appealing for farmers who experience a cash flow crunch every off-season. Funds are available to cover many of the essential costs and inputs during this period, helping you get through it.

Why Seasonal Cash Flow Is a Major Challenge for Farmers

Many business owners are familiar with the constant fluctuations in revenue and cash flow. But farmers and agribusinesses have a seasonal job that runs in very specific cycles. For crop producers, revenue may not hit until the harvest. For those in livestock operations, money might not come in until products are sold.

While revenue may be concentrated in one season and not others, expenses continue throughout the year. That can be a major cash flow problem for many farmers.

It can take months of preparation to plant crops, and expenses can include fertilizer, irrigation, labor, and more. Standard expenses like rent and insurance premiums might also be due before the bulk of your revenue comes in.

Maintaining a schedule and daily operations during this time is critical. If you end up delaying purchases or reducing labor, it could impact your yield. Not having the right equipment or having broken machinery can throw off operations and, as a result, your income and expenses.

Where Can You Get Farm Operating Loans?

Farmers can get farm operating loans from various sources. However, eligibility, interest rates, loan amounts, underwriting, and how the funds can be used vary by lender and program.

1. Farm Operating Loans from the Farm Service Agency (FSA)

The U.S. Department of Agriculture (USDA) has a specific department called the Farm Service Agency, which offers farm operating loans to eligible applicants. These loans provide funding to farmers and ranchers to cover operational expenses.

To qualify, applicants must be a U.S. citizen or non-citizen national and have what’s considered a satisfactory credit history. Plus, borrowers must demonstrate an ability to repay the loan and have been unable to get agricultural loans with reasonable rates and terms elsewhere.

There are two types of loans offered:

1. Direct farm operating loans: Come directly from the FSA and have a maximum loan amount of $400,000.

2. Guaranteed operating loans: Unlike direct loans, guaranteed loans come from commercial lenders but are guaranteed by the FSA up to a specific amount.

2. Banks and Specialty Agricultural Lenders

Farm operating loans are also available through traditional banks and specialty agricultural lenders. For example, Farmers & Merchants Bank offers farm operating loans as does American AgCredit, which is a member of the Farm Credit System.

Eligibility may be based on the farm’s revenue and cash flow, as well as credit history, time in business, and collateral. However, exact requirements and loan offerings vary by lender.

3. Online and Alternative Lenders

Online and alternative lenders may also offer farm operating loans with a faster application process and quicker funding depending on their qualifications.

How to Calculate How Much You Should Borrow

Farm operating loans can help you manage cash flow between harvests, t as a borrowing tool, it’s key to calculate how much you need.

Too little could leave you vulnerable and short on cash before the season ends. Borrowing too much could increase interest costs and make repayment more expensive. Before applying for financing, estimate your operating expenses.

Begin by:

• Creating a budget for the next production cycle
• List all operating expenses with projected costs for the next production cycle
• Include a small buffer for contingencies, such as bad weather, inflation, or equipment repairs
• Review current cash reserves

Going through this process can help you identify how much to borrow. While that amount may be what you need, the exact loan amount you’re approved for depends on the lender. Typically, lenders review your current cash flow, tax returns, and revenue to assess your ability to repay what you borrow.

Farm Operating Financing Repayment Schedules

Farm operating financing repayment schedules vary by lender and the type of loan. Some lenders may require standard monthly payments. Others may offer repayment schedules that align with the harvest, making repayment easier.

Before applying for financing, review interest rates, repayment terms, and fees. Knowing how the repayment schedule works can help you plan and manage cash flow responsibly.

Farmers facing financial challenges due to weather, price fluctuations, or lower yields should reach out to their lender to discuss options. Lenders may be willing to work with you on an arrangement, so you remain in good standing.

Avoid Default on Farm Operating Loans

Taking out loans for your farm can provide a much-needed funding source during the seasonal slowdowns. However, taking on any debt is always a major responsibility. For your business and credit health, it’s key to avoid default and ensure that your loan payments are manageable.

Review your financial situation to ensure you can afford payments and only borrow what you need. Continue to check your farm’s performance and audit your production costs. Regularly checking these metrics can make it easier to spot a potential problem ahead.

Boosting your cash reserves can also provide a buffer, in case severe weather and lower yields impact revenue. If at any time you’re facing financial difficulty, talk about options with your lender.

Farm Operating Loans vs. Farming Line of Credit

Farm operating loans and farming line of credit are both financing options that help farmers manage seasonal cash flow. But lenders may have different structures, and terminology can vary by lender. As a result, it’s important to be aware of the differences.

A traditional operating loan typically provides a lump sum upfront to cover seasonal expenses. With a lump sum, borrowers can receive capital upfront to make purchases and repay based on the term and loan agreement.

A line of credit offers more flexibility as it gives farmers access to funds up to a set credit limit. Farmers can draw from that available credit more than once, and typically only pay interest on the funds used. Repayment may vary by lender.

When looking at financing options, be aware of the differences and how repayment works. Some lenders may use terms interchangeably, so review the loan and repayment structures.

Final Thoughts

While farmers may be used to the seasonal nature of agriculture, managing cash flow between planting and the harvest can remain a challenge. Farm operating loans and lines of credit can provide access to working capital and cover any funding gaps while you wait for revenue to come in from crops or livestock.

Before applying, take the time to estimate your financing needs, review projected cash flow, and compare various lending options.

You want to work with a lender that has a repayment schedule that works for you, with rates and terms that are manageable. Finding the right fit can help you navigate seasonal slumps and maintain your day-to-day operations, so you can focus on the fruits of your labor.