Whether you learned to love farming from summers spent on your grandparents’ family farm or studied agriculture in college, starting your own farm can be a rewarding yet challenging venture. Recent statistics show that there were over two million working farms in the United States in 2016; however, this number fell by about 8,000 from the year before. Some new farms fail in their first year because of financial issues, but as a first-time farmer, there are a few strategies you can use to build a solid financial foundation through loans as you grow your new agricultural business.
1. Be Realistic About Your Needs
Before you begin to browse financial institutions that specialize in farm loans, it is wise to sit down and create a plan. While you may have grand aspirations for your farm, knowing how much you will need to borrow and for what can help you fill out loan applications more efficiently and talk about your plans to a loan officer in terms that are based on facts and figures, not your dreams.
One effective way to measure your plans against realistic needs is to write out a financial plan. List the equipment you will need to grow certain crops, how much acreage you will need, and whether you plan to raise livestock as well as crops. Keeping livestock typically costs more than growing crops, so you may want to consider trying to secure a smaller loan at first and then add livestock later, when you are certain your new farm is prospering at a level where you can maintain them.
2. Seek Out a Financial Mentor
You may be able to increase your chances of getting a farm loan by seeking out an experienced farmer who has dealt with the paperwork and red tape that can tangle and confuse first-time farmers. Finding mentorship before you meet with loan officers can help you understand the process and build a solid financial foundation for the future.
Connecting with a mentor can assist you in several ways. Most importantly, an experienced farmer can help you find grants, loans, and training programs that may earn financing for your farm. Long-term mentoring can help you find further funding as your farm grows and you require new equipment or further training to learn a new skill, such as the feeding and care of chickens to produce eggs. Having a veteran farmer in your corner may help you feel more confident about the financial side of farming, especially as a first-time farmer.
3. Be Prepared to Answer Questions
While you may be focused on what might happen once you secure a loan, it is important to prepare yourself for the loan interview and practice answers to any questions that may be posed to you. For example, during the loan interview, you may be asked how you plan to pay back any money loaned out, whether you need funds for any outbuildings, (barns, sheds, and coops,) and whether you have any previous farming experience.
If you are concerned about your lack of experience, you can take comfort that this will not likely be the only criteria a lending institution uses to gauge your creditworthiness. A loan officer may also review your debt-to-income ratio, how much money you can invest in your farm at the outset, and whether you can offer any collateral.
4. Review Your Credit Report and Score
One vital step in securing financing for your farm is to understand your credit rating and how it might affect your chances of approval. Even if you have some idea of what your credit score is and how past debts might be impacting it, knowing for sure can help you avoid any unpleasant surprises at your loan meeting. You might want to keep in mind that your credit score is not the same as your credit report, and understanding how one affects the other can be an important factor in securing a farm loan.
You can receive your credit report annually for free from one of the three major credit reporting companies: Equifax, TransUnion, and Experian. Your report lists outstanding debts, what debt, if any, has been reported to the company, and lists charge-offs and existing debt. The contents of this report can affect your credit score, which is largely determined by your payment history and current debt. While not all farming lenders compute risk the same way, knowing this information can help you prepare for your interview.
5. Compare Lenders Based on Your Needs
Borrowing conservatively based on your farm’s needs can help you avoid inflated loan payments and the need to struggle financially during your first year of farming. You can avoid this error by comparing lenders before applying and finding one that suits your future farm’s specific needs.
One way to compare lenders is to consider which specific services they offer. For example, Western AgCredit has a variety of loans available that include equipment and operating funding, as well as revolving lines of credit that may help you keep your farm running without the need for applying for new loans in the future. Matching an agricultural lender with your farm’s needs can help you keep loan payments and operating costs reasonable.
6. Make an Initial Investment
Today’s agricultural market has prompted many lenders to look for borrowers who have already made an initial investment in their farm. While this does not mean automatic disqualification for a loan if you are a first-time farmer, some lenders expect to see that you have invested at least some capital into equipment, land, or livestock. Doing so may show lenders that you are serious about your future farming plans and are committed to your business plan.
7. Assess Future Risks
One factor that you may want to consider is how you might deal with future financial risks on your farm, as your lender will probably be looking at them as well. Equipment breakdown, storms and early freezes that kill crops, or a disease that wipes out your chickens can all mean a financial loss. Being able to discuss these risks and how you might protect yourself from defaulting on your loan because of them can make a lender feel more confident about approving you.
As a first-time farmer, making financial decisions and finding funding can be daunting. However, when you are well prepared and confident about your agricultural business plan, your chances of securing a loan can flourish.
