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September/October 1993 Financing Your Small Farmby Karen Klonsky, Agricultural Economist, UC Davis If you are a beginning farmer, you may be having trouble getting a loan. Perhaps you do not have enough money or assets to use as loan security. Maybe your bank does not make small loans because the costs are as high as for large loans, but the profit, based on the amount lent, is smaller. Other problems include the high risk of growing specialty crops. Despite these problems, credit is available from banks, Farmers Home Administration, the Farm Credit System, and rural development corporations. These groups coordinate their efforts to develop loans that will appeal to small farmers as well as lenders. Before applying for a loan, arrange for a co-signer (if necessary) who has the required collateral; and prepare a resume to demonstrate your profit-making ability. Local BanksLocal banks are a source of short-term credit. Obtaining a loan from your own bank is a benefit to both you and your banker, because your interest rate will be smaller and you deposit your profits in the bank, increasing their income potential. Because the primary source of funds is from deposits, loan size may be small. Some local banks are able to offer long-term loans by selling the loans to an insurance company that provides the funds for the loan. Farmers Home Administration (FmHA)FmHA, an agency of the US Department of Agriculture, makes and guarantees loans to farmers who are otherwise unable to obtain credit. To qualify, you must be a permanent resident alien or US citizen, operate a family-size farm, have a satisfactory credit history, and have the education, training, or experience to operate a farm. The loans are to buy, expand, or improve operations. Some funds are targeted for socially disadvantaged operators who are African American, Native American or Alaskan Natives, Latino, Asian American or Pacific Islanders. Eligibility is determined by the local FmHA county or area committee. Once eligibility is established, the county supervisor helps you design a farming plan. FmHA provides technical advice in carrying out the plan. FmHA also provides financial counseling. If you qualify for a direct loan in all ways except cash flow, you may qualify for the "limited resource interest rate," usually three percent less than the going rate. The loan guarantee program includes a similar provision called "interest assistance." FmHA can subsidize interest payments up to four percent if it will improve cash flow to the point of making the loan acceptable to a bank. FmHA guarantees loans for up to 90 percent of the loan and interest. Repayment terms range from one to seven years for direct loans. You negotiate the term and interest rate for guaranteed loans with the lending institution. The limits are $200,000 for direct loans, $300,000 for guaranteed ownership loans, and $400,000 for guaranteed operating loans. The maximum repayment term is 40 years. FmHA will require you to pledge all assets as collateral. You must have a positive cash flow for a direct loan and a 20 percent margin for a loan guarantee. (A commercial lender generally requires a 30 to 40 percent margin on cash flow.) There are state, district, and county FmHA offices in California. Obtain an application from a county office, usually located in the county seat. (Some offices serve more than one county.) Offices are listed in the phone book under United States Government, Agriculture Dept. Farm Credit System (FCS)FCS offers credit-related services to farmers and ranchers through three associations: Production Credit Associations which make operating and equipment loans, Federal Land Bank Associations which make real estate loans, and Agricultural Credit Associations which make operating, equipment, and real estate loans. FCS organizations lend money from funds raised by the sale of bonds and notes. Most bonds are issued in denominations of $5,000 and typical maturity is six months. If you get an FCS loan, you are required to buy stock from between two and 10 percent of the amount borrowed. You get the stock back as the loan is repaid. There is a loan fee. Once your long-term performance is established, only annual financial statements and crop progress reports are required for another loan and the credit check and verification are not as involved as for a new borrower. This reduction in paperwork reduces the costs of making the loan. You don't have to pay a loan fee each year. A revolving line of credit for a production loan can be made for up to four years. A multi-year production loan can be a problem, however, because you cannot be flexible in what you plant. Association offices are located throughout California. Regional Development
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