Farm Loan Basics

Am I Ready to Borrow Money?

An Outsider’s Perspective of the Loan Approval Process

An Insider’s Perspective of the Loan Approval Process

Debt Capital Equity Capital

Borrowed money, Ownership stake,

repaid in the future, yields $ (dividend) to

Owed to creditor shareholder, typically held as an

investment

Flavors of Capital Funding

Debt Capital Equity CapitalLoan Your savingsCredit card Mom and DadPawn shop Sale of stock

Neighbor helping outAngel Investor

Specialty Capital Grants

CSA shares

Where Capital Comes From

Appropriately structured loan… To achieve realizable goals… That are within the capacity of the borrower

to manage and achieve… In order to accomplish repayment and

further profitability for the borrower

What is Constructive Credit?

A loan for more than you need… For a farm enterprise purpose neither

you nor the lender understand… Without adequate assessment of risk… Without likelihood of repayment.

Constructive Credit is not:

Business Plan: Your design for your business Doesn’t have to include borrowing But must include source(s) of money

For any partnership, business goals must be aligned Long term viability High expectations of success Valuable partner Farm Credit and our Member-Borrowers have

an investment in each other

Obtaining Constructive Credit

For you to be a valuable partner: Business plan Accurate financials Honest and ethical relationship

For a lender to be a valuable partner: Knowledge of your type of agriculture Interest in long-term relationship Capacity to meet your needs Competitive products/quality services Stable staff/access to decision maker Clear communications

Relationship Lending works both ways

You decide how prepared you are to borrow

Understand Your Financial Position How does it compare to your industry? How does it fit with your plans and goals? What needs to happen to get from “A” to “B”

Recognize Your Own Strengths and Weaknesses Production Financial Marketing Managerial

Getting Ready

Draft a Realistic, Written Business Plan Goals statement Resume and References What needs to happen to get from “A” to “B” Detailed Financial Statement Income & Expense with History & Projections Cash Flow Marketing Plan Capital Spending Budget Source & Use of Capital Back-up Plan

Preparing for Success

Character Experience, reputation, history with other creditors (CBR)

Capacity Earnings, historical and projected Ability to repay the proposed debt and provide excess funds for family

living and CAPEX under reasonable circumstances Borrower’s sensitivity to rates, input costs increases, decline in demand

Capital Current financial position Funds available for down payment, working capital, etc Post-close position, room for adversity

Collateral Security position of Lender (and their requirements) Personal Property or Chattels Real Estate

Conditions Additional Terms and Conditions Reporting requirements, results related requirements Guarantee requirements

The Five Cs of Credit

A+J Enterprises, LLC Preliminary Analysis

Assets LiabilitiesCash $3,000 Current Liabilities $1,000Inventory $3,000 Credit Cards $1,000Other Current Assets $4,500M&E/ PP/ Vehicles $15,000 Car Loan $9,000Retirement Accounts $4,500Real Estate $120,000 Mortgage $49,000Total Assets $150,000 Total Liabilities $60,000

Net Worth $90,000Net Worth % 60%Working Capital $8,500

EarningsSales $45,000Variable Expenses $31,950Gross Margin $13,050Fixed Expenses $6,750Net Earnings $6,300Off Farm Income $45,000Family living $30,000CADSNI $21,300Debt Service $13,000Cash Excess $8,300Proposed debt $5,000Proposed Excess $3,300

Farm Credit USDA/FSA and SBA (also provides

guarantees and credit enhancements) Local Commercial Lenders Mission-based Lenders (FarmStart,

Carrot Project) Family Other individuals Merchants & Suppliers

Sources of Debt Capital to US Agriculture

Resources: Cooperative Extension, USDA, Farm Credit

Networking: Farm Bureau, Farm’s Union and local farmers MA Association of Roadside Stands, MA Association

of Dairy Farms, Worcester County Beekeepers New England Small Farms Institute/ New England

Land Link Each state has unique programs available

I Need Help to Figure this Stuff Out!

Farm Service Agency

USDA

Mission Statement

To advance family farmers and ranchers build and sustain family farms and ranches and develop the financial and business expertise to qualify for commercial credit.

“Serving Family Farms, Cultivating Opportunities”

Who is FSA

The Farm Service Agency (FSA), is an agency within the United States Department of Agriculture (USDA). FSA’s Farm Loan Programs (FLP) can provide credit to agricultural producers who are unable to obtain private, commercial credit. FSA places special emphasis on providing loans to beginning, minority and women farmers and ranchers.

Introduction to FSA Farm Loans

If you are a farmer or rancher who is unable to obtain credit from another lender to start, purchase, sustain, or expand your family farm you may be able to get a loan through FSA’s Farm Loan Programs.

FSA has different types of loans depending on your current situation and what you need the loan for. FSA loan officers are available to answer your questions and to help with the application process.

USDA-Farm Service Agency

What Type of Loans are Available

Guaranteed Loan Program• Farm ownership• Operating• Conservation loansDirect Loan Program• Farm ownership• Operating• Emergency • Conservation loans

Farm Loan Programs Information ChartType of Loan Maximum Loan Amount Rates and Terms

Direct Farm Ownership $300,000 Term: Up to 40 years Interest rate: fixed**

Direct Down Payment The lowest of the following: 45% of the farm or

ranch purchase price 45% of the appraised

value $500,000

Term: Up to 20 years Interest rate: fixed**

Direct Operating $300,000 Term: 1 to 7 years Interest rate: fixed: **

Direct Emergency The lowest of the following: 100% of actual or

physical losses $500,000

Term: 1 to 7 years (possibly up to 20 years) for non-real estate purposes

Up to 40 years for physical losses on real estate

Interest rate: fixed**

Guaranteed Farm Ownership

The maximum loan amount is adjusted annually for inflation*

Term: Up to 40 years The interest rate is

negotiated by you and your lender.

Farm Loan Programs Information Chart Continued

Guaranteed Operating The maximum loan amount is adjusted annually for inflation*

Term: 1 to 7 years The interest rate is

negotiated by you and your lender.

Guaranteed Conservation The maximum loan amount is adjusted annually for inflation*

Term: Up to 20 years The interest rate is

negotiated by you and your lender.

Land Contract Guarantee A maximum purchase price of $500,000 on a new land contract

Term: Contract payments must be amortized for a minimum of 20 years with equal payments during the term of the guarantee. The guarantee period is 10 years.

Youth Loan $5,000 Term: 1 to 7 years Interest rate: fixed: **

* To determine the maximum loan limit for the current year, please check with your local FSA loan officer at http://offices.sc.egov.usda.gov/locator/app or our website at http://www.fsa.usda.gov/Internet/FSA_File/guaranteed_farm_loans.pdf

** Direct loan interest rates are adjusted monthly and are posted online at http://www.fsa.usda.gov/FSA/webapp?area=home&subject=gfmlp&topic=fir and at your local FSA office.

Loan-Specific Eligibility Requirements

Direct Operating Loan

– Meet all general eligibility requirements– Have farm experience equal to minimum 1 year

full production and marketing cycle – 7 year term limit for direct OL assistance, with 1

time 2-year waiver– Beginning Farmers may receive no more than 10

years direct OL assistance

Farm Managerial Experience

Farming Experience Owner, manager or operator of farm business for

minimum 1 production & marketing cycle Monitor production and marketing Hire, assign and supervise workers Oversee maintenance of property and equipment Determine when to cull livestock Select seed varieties; when to plant/seed/harvest; when to

fertilize & method Determine crop transportation or storage requirements

Raised on farm, management decision-making Employed as farm manager or farm management

consultant for minimum 1 production & marketing cycle

Rural Youth Loans

Finance modest, income-producing, agriculture-related, educational project that falls under authorized loan purposes

Eligibility: 10 to 20 years old Lives in community 50,000 persons or less Project related to 4-H, FFA, Grange Youth Parental permission and supervision Project Advisor

Maximum Loan Amount is $5,000 Rates and Terms

1 – 7 years, depending on loan amount and security Direct OL interest rate

• Eligibility Requirements– $5,000.00– 10 to 20 years old– Reside in rural area– Have a project advisor– No history of debt forgiveness – Adequate Security – Parent Consent– Annual installments

FSA Youth Loans

Farm Storage Facility Loan

FSFL Program Purpose

Provides low interest financing for producers to build or upgrade farm storage and handling facilities to store the commodities they produce.

Eligible Commodities Corn, grain sorghum, rice, soybeans, oats, peanuts,

wheat, barley or minor oilseeds harvested as whole grain

Corn, grain sorghum, wheat, oats or barley harvested as other-than-whole grain

Pulse crops - lentils, chickpeas and dry peas Hay Renewable biomass Fruits, Nuts and Vegetables - cold storage facilities

Maximum Loan Amount Maximum loan amount of $500,000

Loan Process Borrower must meet eligibility requirements COC or STC approval required before construction can

begin $100 application fee 15% cash down payment required

Rates and Terms 7 years; 10 years; or 12 years depending on amount of

loan Interest rate fixed for loan term at rate in effect the

month the loan is initially approved Interest rate is equivalent to the rate of interest charged

on Treasury Securities of comparable term and maturity

FSA’s Microloan Program

The Farm Service Agency (FSA) developedthe Microloan (ML) program to better servethe unique financial operating needs ofbeginning, niche and the smallest of familyfarm operations. Examples might include; directmarketing to restaurants and grocery stores,organic production, community supportedagriculture (CSA’s) and farmers markets.

Fulfilling a Need

Assisting applicants who have limited experience by providing them with an opportunity to gain farm management experience while working with a mentor;

Eliminate use of high cost personal loans and high interest credit cards;

Providing a bridge for Youth Loan borrowers to transition to larger-scale operations;

Assisting the agricultural community by creating opportunities to start new businesses.

What is a Microloan

Microloans are direct farm operating loans, either annual or term, that do not exceed $35,000. Microloans have a simplified application process and paperwork and verification requirements that are more proportional to smaller loans and operations.

Micro Loan Overview

Microloans can be used for operating expenses including but not limited to:• Initial start-up expenses; • Annual expenses such as seed, fertilizer, utilities, land rents; • Marketing and distribution expenses; • Family living expenses; • Purchase of livestock, equipment, and other materials essential to farm operations; • Minor farm improvements such as wells and coolers; • Hoop houses to extend the growing season; • Essential tools; • Irrigation; • Delivery vehicles.

Eligibility Requirements

Different types of loans have different eligibility requirements. Some examples of these are:

Being the operator of a farm, having sufficient managerial ability, be unable to obtain credit elsewhere but have an acceptable credit history, and are a U.S. citizen, non-citizen national, or qualified alien.

For more information on general and loan specific eligibility requirements, visit our website at www.fsa.usda.gov or see your local FSA loan officer.

Managerial Ability and Alternatives

Got Experience?Applicants not meeting the general requirement for farm management and experience may still be eligible. Alternatives include an apprentice relationship; past participation with organizations such as FFA, 4-H, Beginning Farmer programs, and Community Based Organizations; even prior small business management experience combined with a self-directed apprenticeship can allow applicant to start farming with a Microloan.

Securing Microloanso For an annual operating purpose, such as purchasing seed, fertilizer and other crop input costs, these loans are generally secured by the crop or products produced, however equipment or other security can be used.

o Loans for other purposes such as purchasing equipment or foundation livestock are usually secured by the equipment or livestock being purchased but other types of security can be used.

All loans need adequate security.

Applying for a Loan You may obtain the forms for a loan application by visiting your local office or from the FSA website at http://forms.sc.egov.usda.gov/eForms/ welcomeAction.do?Home. Your FSA loan officer can provide assistance in completing the FSA forms or can identify other sources of assistance in your area.

You may submit your application by: • calling for an appointment with an FSA loan officer; • mailing, faxing, or delivering your application to your local FSA office; or • electronically submitting your application if you have registered through the e-gov system.

In Summary: Microloans

Are a direct operating loan with a maximum loan amount of $35,000.

Have a shortened application process and reduced paperwork.

Allow some applicants that do not currently meet the experience and managerial requirements to qualify through a self-guided mentorship.

In Summary: Microloans

Provide some flexibility in loan security;

Assist the agricultural community by creating opportunities to start new businesses;

Fulfill financial operating needs ofbeginning, niche and the smallest of family farm operations.