How Farmers and Agri-Businesses Can Access Working Capital Loans

Agriculture is an incredibly challenging industry. Whether you’re starting a new farming operation or building a company to support family farms and agriculture, turning your vision into a profitable company requires significant working capital. Working capital is the money your business needs to keep operations running smoothly, and it’s especially important when you’re a first-time farmer or business owner.

Ag loans for new farmers can be a major lifeline when you’re figuring out the quirks of the business and your operations. Here, we demystify working capital loans to give you a clear roadmap to securing the financing you need for success.

• Why ag loans for new farmers are so important and how commercial lenders can support your business.
• What to know about the eligibility requirements for agri finance, especially for new or small farmers.
• How the ag farm loan application process works, so you can ensure you get the maximum loan amount you’re eligible for.

Why Ag Loans for New Farmers Are So Important

While there are different types of farmer loans, working capital loans are among the most important for several reasons. These loans are short-term financing designed to cover your day-to-day operational expenses. You typically have to repay this type of loan within 18 months, but the term may be longer depending on the lender and your specific needs.

For new farmers who have acquired the necessary real estate already, working capital loans can be key to getting off the ground. Ag loans for new farmers can help ensure everything moves efficiently on your farm. Some of the ways it does this include:

• Covering seasonal expenses: Agriculture is a cyclical industry. In the growing season, you must pay for seeds, fertilizer, fuel, labor, and equipment maintenance. When it’s time for farmers to harvest or ranchers to bring livestock to market, there may be different, equally significant costs. Working capital can help cover both of these costs so you can manage cash flow more effectively.
• Managing unexpected costs: The agriculture business may be rife with unexpected challenges, from equipment breakdowns to major weather events. Ag loans for new farmers can provide you an emergency fund buffer to navigate unexpected expenses.

• Capitalizing on opportunities: While other ag loans for new farmers may be more suitable for growth, if you have an active working capital loan it can be a useful vehicle to take advantage of sudden opportunities. Whether it’s buying new land, purchasing wholesale inventory, upgrading machinery or something else, ag farm loans can help you accomplish these goals.

• Maintaining operational efficiency: Ag loans for new farmers can help you pay suppliers on time and meet payroll requirements to keep your farm running smoothly.

Where to Get Ag Loans for New Farmers

There are several good avenues for new farmers and agri-businesses to find loans. Each has its own characteristics, eligibility criteria, and benefits.

1. The Farm Credit System (FCS)

The Farm Credit System (FCS) is a nationwide network of borrower-owned cooperatives dedicated exclusively to serving the financial needs of agriculture and rural America. It can be a great resource to get ag loans for new farmers.

The FCS works with banks and local associations, so you’ll need to contact your local Farm Credit association to understand the particulars of the application process in your area and with partner lenders.

The primary benefits of working with FCS lenders are that they understand the nuances of farming and working capital needs. As such, they can offer a wide range of loan products, including operating loans specifically designed for working capital needs, intermediate-term loans for equipment and facilities, and long-term real estate loans. Plus, as a cooperative, the FCS often offers competitive interest rates that make them good ag loans for new farmers.

To apply, you’ll typically need to provide financial statements, a business plan, tax returns, and pertinent information about your business.

2. Government-Backed Loans

There are two government agencies that may offer working capital loans to new farmers:

• USDA Farm Service Agency (FSA): These direct loans through the U.S. Department of Agriculture (USDA) provide capital for beginning farmers who may not qualify for conventional bank loans. The FSA offers both direct loans and guaranteed loans that often feature lower interest rates and flexible repayment terms, making them more accessible ag loans for new farmers.
• Small Business Administration (SBA): The U.S. Small Business Administration works with lenders to partially guarantee loan proceeds. This lowers the risk to both the borrower and the lender. The SBA 7(a) and Microloan programs are two of the most popular, and can be used for a variety of purposes, including working capital. These ag loans for new farmers often come with favorable terms, lower down payments, and longer repayment periods due to the government guarantee.

In either case, the application process can be extensive, and eligibility requirements are strict. To qualify for FSA loans, you generally need to be a family farmer and meet credit history requirements. SBA loans are available to other industries, but also require you to meet credit requirements and be able to show that you are unable to secure a loan at a reasonable rate through conventional means.

Head to farmers.gov or the FSA’s local office to get assistance applying for FSA loans.

3. Commercial Lenders

Traditional lenders like banks and credit unions, as well as online lenders, may both offer ag loans for new farmers. Many commercial lenders offer agricultural loans, but not all have the experience of working with farmers and agricultural businesses. It’s important to work with lenders who understand the unique working capital needs of the agricultural industry to get the best terms for your business.

Commercial banks often have stricter underwriting criteria compared to the FCS or FSA. For conventional term loans, you’ll typically have to meet credit score, annual revenue, and time in business requirements, and show a strong business plan that demonstrates how you plan to use the money and repay the loan. Traditional lenders may have lower interest rates than online lenders, but online lenders tend to have faster funding times and easier approval processes.

How to Apply for Ag Loans for New Farmers

Eligibility requirements and application processes may vary between lenders and loan types, but generally, you will need to show how you plan to use loan proceeds and demonstrate that you will be able to generate revenue to repay the loan.

Generally, when you apply for ag loans for new farmers, the process looks like this:

1. Determine your funding needs and eligibility: First, you must get an idea of your operating expenses and financing needs since these numbers and specifics will inform the type of loan and loan amount you apply for. Detailing these numbers in your business plan could increase your chances of approval. Moreover, you should also closely review the eligibility requirements for government-backed loan programs to see if you qualify.
2. Research lenders: If you qualify for USDA or SBA programs, you may have a leg up for approval and more competitive loan terms. But you’ll still need to compare lenders to see what interest rates and terms they offer for loan programs. Compare lender reputation, fees, interest rates, and loan terms when weighing your options.
3. Gather documentation: Ag loan requirements vary by lender, but usually, you’ll need to show a business plan, tax returns, bank statements, financial statements like balance sheets and P&L statements, and financial projections.
4. Provide collateral details, if necessary: Some ag loans for new farmers may require collateral or a down payment to secure the loan. Collateral is an asset that the lender may seize if you fail to meet the loan terms. You don’t always have to get a secured loan, but some lenders may require it or encourage it to provide more competitive interest rates.
5. Apply: You can often apply for financing online, but some lenders may require you to apply over the phone or in person.

Final Thoughts

Accessing working capital loans is a critical step for new farmers and agribusinesses looking to expand and succeed. The earlier you start building relationships with lenders, the better your chances of getting more funding in the future as your business grows. Remember to utilize resources like USDA regional offices and agricultural non-profits to help you find the best ag loans for new farmers and secure working capital to support your business’s current and ongoing financial needs. Working with the right lender can help set your farm or agribusiness up for long-term success.

FAQs About Ag Loans for New Farmers

What are working capital loans different from other farm loans?

Working capital is the money you need to meet daily operational expenses. It’s the capital used to keep your business running. Working capital loans are designed to help you meet these short-term expenses, like seeds, feed, fuel, labor, and maintenance. Other farm loans may be geared more towards general growth or specific assets, like equipment or real estate, and have longer repayment terms.

Can I get working capital loans with limited credit history?

The USDA Farm Service Agency (FSA) is often the best starting point for new farmers with limited credit. This agency offers farm operating loans and microloans specifically designed for beginning and small farmers who may not be able to qualify for conventional credit. These may often be the best ag loans for new farmers lacking credit history.

Do I need a formal business plan to apply for a working capital loan?

While some lenders may not require you to provide a formal business plan for microloans, it can only help with your loan application. Most lenders do require business plans for any business loan as it demonstrates you have a clear understanding of your market and how you intend to repay the loan.

What kind of collateral is typically required for agricultural working capital loans?

You may be able to qualify for unsecured working capital loans without collateral if you have a strong credit history and revenue. However, ag loans for new farmers may require collateral like farm equipment, harvested crops, livestock, or accounts receivable. For farm ownership loans, you may have to put up the property itself as collateral.

How long does getting approved for an agricultural working capital loan typically take?

Approval timelines vary significantly between lenders and loan types. Traditional banks typically have longer approval timelines, especially if you’re applying for FSA or SBA loans. Online lenders often offer shorter approval timelines.

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