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How to Finance the Expansion of Your Family Farm

In Missouri and Arkansas, agriculture is our biggest industry, and the vast majority of our farms are family owned—with 90% and 97% of farms being owned and operated by individuals and their families, respectively.

As an independent farmer, decisions for expansion, from narrowing down plans to securing financing, rest entirely on your shoulders. This fact in and of itself can be daunting, as a bad choice could lead to significant financial hurdles down the road. Fortunately, there are many resources in our area available to guide you as you make your plans, from experienced ag lending partners to county extension office agents.

In this post, we’ll delve into the different forms of lending available to fund a diverse range of farm expansion plans and projects, as well as considerations to keep in mind as you determine which options might work the best for your goals and financial picture.

What is an Ag Loan?

Agricultural loans are a kind commercial lending product specifically designed for the unique needs and purposes of farmers and ag professionals. Loans can cover a variety of costs from operating expenses to equipment and real estate purchases, and each type of loan will have different terms and conditions (more on this below).
Unlike general commercial lenders, agricultural lenders understand the ebb and flow of farm business finances and can expertly read your cash flow statements and balance sheets to help you find an affordable financing option for your requirements.

What are the Different Types of Ag Loans available?

Some farm financing can be used for a variety of uses, some lending products can be drawn from as needed, and some are designated for strict purposes. Here is a general breakdown of the types of loans you may be able to use for your farm’s expansion.

Real Estate Loans

Loans used to purchase land and/or buildings, or construct, expand, or renovate structures, or refinance existing real estate loans. At CS Bank, we offer the following Ag Real Estate loan options:

Operation and Improvement Loans

Sometimes you need short-term funding to cover expenses used in the business of running your farm, from purchasing livestock or seed to making improvements and repairs. If you are expanding your production, you may need additional temporary funds beyond your cash reserves to cover the increase in expenses. We offer a variety of loans and lines of credit that can cover these day-to-day or seasonal needs:
  • Commercial Ag Operating Loans, loans and revolving lines of credit that provide working capital when you need it.
  • Poultry Loans to accommodate the needs of your chicken or poultry farm, from construction and improvements of buildings to the purchase of stock.
  • Livestock Loans for the purchase of livestock and feed or improvement of facilities.
  • Farm Service Agency (FSA) Operating Loans can be used for general operating expenses as well as repairs, conservation improvements, debt refinance, livestock purchases, and reorganizing your farm to improve profitability.
  • Small Business Administration (SBA) Loans can be used to cover working capital needs as well as improvements for agricultural businesses who may not qualify for other commercial loans.
  • Farmer Mac (FMAC) Loans can also be used for your farm’s operating expenses. (Or long term fixed rates)

Equipment Loans

If you’re increasing acreage, head, or simply want to improve the efficiency of your production, you may have an equipment purchase or two on the horizon. Here are a few methods you can use to finance them.

How to Determine Which Ag Loan is Right for You

You may know exactly what you need to use your financing for—but there is often more than one choice available to you, with different rates, terms, and repayment requirements. On the other hand, you may require funding for a variety of needs, some of which you aren’t sure about yet. Working with an experienced ag lender who knows the industry can help you explore all the available options for your farm, crunch the numbers, and see what makes the most sense for your current financial picture and future goals.

As you are considering your options or preparing to reach out to your lender, think about your farm’s goals. Below we’ll explore a few common ones, as well as a sample financing scenario for each goal.

Expanding Your Farm’s Land

Whether you already own your own land and are looking to grow your acreage or are currently renting land and are hoping to establish a permanent foothold, purchasing land is an ideal avenue for growing your farm. Farmland can qualify for property tax exemption in Arkansas, provide collateral for future loans, stabilize your farm business, and even serve as a profitable investment.
While there are many financing options for purchasing land, not all are available to each farmer, some may be more affordable month-to-month, while others may save you money in interest in the long-term. Let’s look at a scenario.

Scenario: Our first farmer is a first-generation farmer who has cash rented land for the past five years. She is looking to finally purchase a nearby property but has limited cash reserves on hand—which she would prefer to keep mitigating seasonal cash flow.

Solution: After speaking with her ag lender, she decides to apply for a 0-down payment Farm Service Agency (FSA) Loan. She knows qualification for traditional lending will be difficult, and an FSA loan will provide her with the funds she needs, at an affordable rate, without dipping into her cash reserves.

Diversifying Your Farm’s Output Offerings

Diversification is an effective strategy for reducing the impact of down years for certain crops or products, while also allowing you to discover hidden potential for increased profits. When you expand your farm’s areas of focus, it may require significant initial funding to establish the appropriate infrastructure. You may also find that you are more dependent on your line of credit to float you through the first years as you establish your new stream of income.

Scenario: Our second farmer’s main growing focus is a standard soy/corn crop rotation. In recent years he has begun growing hay for fodder and partnering with a neighboring farmer to create silage for his neighbor’s cattle. He is planning to continue to diversify his farm and is looking to purchase his own herd, building the facilities he needs to not only shelter his cattle but also store his own silage and feed.

Solution: Our second farmer initially came to CS Bank for a Livestock Loan to purchase his new herd. However, after talking to his lender, they decided a Farmer Mac (FMAC) Loan was a better fit for his needs, offering a long-term fixed rate which will allow him to put more funding toward building his new facilities while reducing his monthly payments.

Growing Production Efforts or Increasing Efficiency

If you’re looking to increase production or improve your efficiency an operating loan might be the right loan for you. If your expansion plan includes purchasing more equipment, ag lenders, you may want to seek out a farm equipment loan to help you finance your machinery and implements. However, these aren’t the only options available to many farmers.

Scenario: Our third farmer has had the luck of consistent profits, but in recent years he’s noticed his margins have become slimmer—in part due to interest on several outstanding loans. He is working with his extension office for plans to increase efficiency and has decided to upgrade his equipment and make some improvements to fields affected by poor drainage.

Solution: Our third farmer doesn’t meet eligibility requirements for an FSA loan because he is well-qualified to obtain conventional financing. And after examining his balance sheet, his lender also rules out an SBA loan for the same reason. While it may be possible to obtain separate loans for equipment and land improvements, because he already has several loans, they decide it makes more sense to simplify his debts. They opt to refinance the farm with the balances of his previous loans, improvements, and equipment included in the new loan amount—he’ll save money on interest and be able to take advantage of additional tax deductions, as well.

Growing Your Team

Maybe your plans for increasing production have really paid off or perhaps after years of hard work your farm is making a decent profit and you’re ready to hire additional help to reduce your workload. While it may seem counterintuitive, hiring new employees can increase your bottom line, allowing you to focus on more pertinent business and farm management decisions and completing tasks with greater efficiency when on a time crunch.

Scenario: Due to weather conditions and smaller planting and harvesting windows, in our fourth scenario a husband-and-wife farm team have struggled in recent seasons to get everything done—risks they aren’t as willing to take as they get older and near retirement. While they have some seasonal help, they are looking to hire more, and make one of their regular employees full-time to help with maintenance year-round.

Solution: Because our farm family knows their income will fluctuate over the course of the year, after reviewing cash flow statements with their lender they decide a Farm Operating Line of Credit is the right answer. It will allow them to keep the bills and paychecks paid, even before income rolls in, so they can hire additional help and focus more on managerial tasks.

Should You Refinance Your Farm?

If you’re like the farmer in our third scenario, you may be wondering if refinancing makes sense for your farm and your financial health. Refinancing can consolidate debt, save money on interest, or make monthly payments more affordable. However, refinancing isn’t the best choice in all circumstances.

Refinancing may make sense if:

  • You can save money on interest: on annual or long-term interest costs.
  • You can reduce your monthly payments while not increasing interest costs of the life of the loan dramatically.
  • You need to reduce too many monthly payments to get them to an affordable place for your cash flow needs.
  • You want to spread out additional large expenses (like equipment purchases) to make them more affordable month-to-month.

Refinancing may not make sense if:

  • Refinancing adds significant interest costs to the life of your loan because of rate changes or amortization.
  • You are near the end of your current mortgage or loan and refinancing means adding years of additional payments.
  • You are able to comfortably manage new short-term debts without having to refinance.
Partnering with an experienced ag lender can help you weigh your options, run through multiple loan scenarios, and find the right financing path that helps you stabilize your farm business and keep it successful for years to come.

How to Apply for an Ag Loan

Applying for any business loan can be a complex process—but your lender will be able to work with you to ensure you have all the information and documents you need in advance. Generally, you’ll need documentation for your agribusiness, and personal financial and identification information, including:

  • Income tax returns
  • Balance sheets documenting assets and liabilities
  • Cashflow statements
  • Profit and loss statements
  • Titles for property used to secure funds
  • Insurance policies
  • State-issued IDs for all applicants
Whether you are an incorporated farm business or a sole proprietorship, your credit score and debt-to-income ratio must be able support your credit worthiness and ability to repay the loan. While exact numbers vary depending on your loan product, good credit (a score above 620 for individuals or 80 for businesses) is important.

Lastly, and perhaps most importantly, it’s essential to have a detailed business plan for expansion. Your plan should include research on anticipated costs, timelines for completion, and expected proceeds. Working with an ag expert at your county extension office in Arkansas or Missouri can help you materialize your plan and best prepare for your loan application.

Talk to an Ag Lender about Your Farm Expansion Plans

Many CS Bank Ag Lenders are farm owners just like you, and we understand the risks and challenges of running a successful agricultural business. Planning a farm expansion—whether it’s purchasing additional acres or branching out into a new crop or revenue stream—can be a complex process. Our team of experienced and knowledgeable lenders can help you navigate it, from your initial planning stages to choosing the right loan for your needs.

Reach out to us today or visit one of our branches in Eureka Springs, Berryville, Harrison, Huntsville, Holiday Island in Northwest Arkansas or Cassville in Southwest Missouri to learn about our many Agricultural Loan options and begin on the path to your farm expansion!