Whether a farmer needs help in the beginning stages or in a season of growth or maintenance, a farm loan can offer a financial lifeline for greater success. Farm loans are essentially a small business loan and have multiple uses, including: operating expenses, livestock purchases, machinery and equipment investments, or building a permanent structure on the land.
Whatever the motivation, you can find a variety of options for farm loans, including those offered through private lenders or government agencies.
Farm Loan Eligibility Requirements
Every lender has specific requirements for its farm loan approval, but in general you can expect a loan requiring you to show proof of farm ownership or a farm enterprise, proof of a land purchase or plans of purchasing land, U.S. citizenship, and details on the intended use of the funds.
You may also have to disclose your farm business plan and current balance sheets. A lender may also require income sheets and detailed financial statements, so they can be sure you can afford monthly payments over the life of the loan.
Farm Loan Qualification
Qualifying for a farm loan requires going through an approval process with a lender. Each lender has its own unique underwriting process, which can impact the specific qualifications needed and supporting documentation required for approval. You can generally expect the underwriters to review the following factors.
Debt-to-Asset Ratio
The debt-to-asset ratio refers to the total liabilities of the farm business divided by the total assets. This ratio tells a lender how much of your farm remains financed by debt. The higher this ratio is, the lender may view it as a farm having a greater portion of debt and could face greater risk of making debt payments.
Current Ratio
Another ratio lenders consider is the current ratio. This ratio calculates your farm’s current assets divided by its total liabilities. When a lender sees this number, it tells them how likely you can pay off your short-term debt (debts due within a year).
Debt Service Coverage Ratio (DSCR)
The DSCR ratio tells the lender how much your farm can produce in cash flow that can support your farm’s monthly debt obligations. It’s calculated by dividing the farm’s net operating income by its debt.
The exact number needed for each of these ratios and other metrics depends on the lender and type of farm loan you’re applying for. It’s important to shop around and compare the available loan products a lender offers.
How To Get a Farm Loan
Getting a farm loan uses a similar process you would expect with a personal or commercial loan, including:
- Narrow down your financing needs: Make a detailed plan on how much capital you need and for what purpose, which can help you narrow down what loan program you choose. It’s also an ideal time to review your budget and how much you can afford for a monthly payment.
- Review the loan requirements: Once you find a loan that meets your needs, review the lender requirements such as credit score, down payment, annual revenue, and others.
- Compare lenders: After reviewing several loan programs, you can compare lenders and search for the one most suitable for your farm business. Look for factors with each lender such as the loan types offered, maximum funding amounts, rates and fees, repayment options, and the overall application process.
- Gather documentation and apply: After finalizing the decision on a lender, it’s time for gathering the needed information and documentation. You may even have a lending representative you can work closely with through the process and for answering any questions. It can take days or weeks to receive a decision after submitting an application, depending on the lender’s process.
Farm Loan FAQs
What credit score is needed for a farm loan?
As with any loan, the exact credit score needed for a farm loan depends on the lender and type of loan you’re applying for. However, having a good or excellent credit score (which means a minimum of at least 670) will increase your odds of approval. Some loan programs, such as the FSA loans, do not rely on a credit score for loan approval.
Can you get a farm loan with no down payment?
It’s possible you can qualify for a farm loan with no down payment, depending on the loan program. For example, a Direct Farm Operating loan from the FSA does not require any type of down payment.
