Agribusiness is big business. There are 2.02 million farms in the United States, and the average farm has 444 acres. Gross cash farm income was forecasted to be $512 billion in 2022, and grow 6.6% from 2020. Corn and soybeans were 40% of all crop cash receipts, and cattle/calf receipts were 38.2% of animal products, which could guide some farmers into deciding where to invest in new crops and animals.
The small family farm makes up 98% of all farms in America and they make 86% of U.S. agricultural products. Whether you’re one of the newer entrants attracted to the industry – over 25% of farmers are beginning farmers with an average age of 46 – or your family has worked the same land for generations, it might be time to invest more capital in your business. An investment of outside capital can help you purchase new machinery, expand existing operations, or market your farm.
Outside capital can come in several forms, but one of the most common is through a business loan. Borrowed capital allows small business owners to maintain and grow their core business without having to dip into investments or savings. But since it does carry some risks, you’ll want to ask yourself several questions to determine the best loan product and borrowing situation for your agriculture business.
How can an agriculture loan help your business? Here are four common ways that farmers use these loans.
Hire seasonal workers – The agriculture business is seasonal, and often you’ll need to hire workers for the harvest before it generates revenues. If you manage livestock, staffing 24/7 minimizes loss. A farm loan can cover these costs.
Finance new equipment – an agribusiness loan can finance the purchase of a new combine, tractor, or truck, to either support growth or replace older equipment.
Expand your operation – With a farm loan, you could purchase additional acres to increase yield. An apple farm could add a tractor pull, apple cider booth, and apple picking to bring in visitors and increase revenues.
Invest in new crops/livestock – An investment in new crops or livestock often involves a significant capital outlay.
It’s likely that one of these benefits is why you’re considering borrowing. But, before you contact lenders, dive a little deeper into your borrowing needs.
Getting clear idea on how a loan will impact your business helps ensure borrowing success.
Why do you need to take out an agribusiness loan?
Which of the above benefits do you want to realize from your agribusiness loan? Maybe you have another idea in mind – such as covering working capital needs like payroll of utilities. Knowing why you plan on borrowing helps you formulate a clear plan for the funds.
Without a clear plan, it’s hard to track if you’re receiving the expected benefits from the new project. You could spend the money elsewhere and run into issues completing the project that you intended the loan to fund. Before you borrow, you’ll want to have a clear plan for the funds. Use this time to create a budget and project revenue increases from the plan.
Traditional lenders such as banks prefer funding larger loans. The costs to underwrite and fund a loan at a bank are often the same no matter the loan size, but the bank makes more money on a larger loan. If you want to borrow a smaller amount, for example, $20,000, save your time and apply with an alternative lender, instead. Alternative lenders fund loans in smaller amounts.
Before approaching lenders, know how much you need to borrow. That way, you can use your time wisely, track the project’s success, and allocate the funds correctly.
The budget you created when considering how you plan on using the loan’s capital will come in handy when determining if you can repay the loan. To see if you can afford the loan, add its projected monthly payment to your budget.
If you’re borrowing for a large project, your business’ existing cash flow must be enough to cover payments before the project generates revenues. There will be a lag between the project’s start date and revenue generation, but loan payments will still be due. If you can cover payments, even if the plan isn’t successful or doesn’t generate the expected profits, you’re not hurting your core business and risking default.
Even if you’re borrowing for a shorter-term plan, the loan must be repaid. If you don’t have a budget and repayment plan you could fall into a debt cycle of constantly borrowing to pay off the last loan. Ultimately, this can hurt your business and credit score.
Your credit score will matter when it’s finally time to apply for a loan. It’s a numerical representation of your creditworthiness as a borrower, and includes details on past loan payments, defaults, and late payments. Lenders view it as part of your risk profile.
Banks prefer working with borrowers with credit scores higher than 720. For certain loan products – such as an equipment financing loan where the bank has collateral – they might work with a borrower who has a score as low as 650. But they’ll rarely dip below that number.
Before applying for loans, check your credit score. Review your credit report and identify any errors so that you can get them fixed, thus raising your score. Even if you have a low score, the good news is that borrowers with bad credit can still obtain capital, but you’ll pay a much higher interest rate.
Lenders offer loan products with different rates, terms, and repayment schedules. One of these loans will be the best fit for your needs.
Equipment financing loans are a great lending product to help new or existing farmers. According to a study from Purdue, farms with 3,000 crop acres have a machinery investment per acre around $400 and machinery cost per acre of $116. If you have a standard family farm of 444 acres, that’s $117,600 to invest in machinery and $51,040 to keep it running.
You may need to purchase brand new equipment to support growth, or to replace worn out and older equipment. New equipment could increase yields and shorten harvest times. Whatever the reason you’re considering a new equipment purchase, an equipment financing loan might be your best fit to fund the purchase.
Equipment financing loans have lower interest rates than other other loan products. That’s because the equipment you’re purchasing with the loan serves as its collateral, lowering the lender’s risk. If you defaulted on the loan, the lender could seize the equipment and resell it to recoup their losses. This lower risk of loss to the lender leads to a lower interest rate for you.
Equipment financing loans fund up to $150,000, perfect for a smaller farm, or up to $250,000 if you have a stronger credit profile. A newer farm open less than one year can borrow up to $25,000, and with two years in business you can borrow up to $35,000.
Farmers use borrowed capital in part to offset their business’ seasonality. But if you failed to repay the loan you took out over the winter, or also used credit cards to purchase seed, or perhaps have an existing equipment financing loan, you may have discovered that multiple forms of open credit have hurt your credit score. Lenders previously willing to extend credit may now turn you away.
If this is your situation, your best option is to work with an alternative lender on a bad credit business loan. Alternative lenders extend these loans to borrowers with lower credit scores, sometimes as low as 500, and will look at other factors to approve a loan.
Alternative lenders also move faster than banks, and often approve loans within 24 hours and disburse funds in days. A farm with monthly revenues above $8,000 can qualify for financing with an alternative lender. Shield Funding offers loans from $5,000 up to $1 million, at rates of 12% to 45%, and repayment terms of two to eighteen months.
Do you need to invest in seeds, feed, or pay for storage space costs? Then consider applying for a small business loan for inventory. It can help fund the initial investment if you’re expanding your crop selection, or pay to store inventory if you are struggling to balance cash flow.
A small business loan for inventory can also serve other purposes. Sometimes, an opportunity arises to take advantage of supplier discounts or buy the grain or seed of a farmer that’s retiring. If you have a minimum credit score of 530, at least three months in business, and $10,000 of minimum monthly revenues you can qualify for a small business loan for inventory.
While pledging collateral to secure a loan lowers your interest rate, it increases your risk. If you default, the lender can seize the collateral to recoup their losses. For many farmers, the risk of losing their harvester during a crucial time isn’t one they want to take.
An unsecured business loan allows you to access capital without pledging assets to secure it. If your farm generates minimum monthly revenues of $10,000 and you have a credit score above 500, you may qualify. You can take anywhere from two months to three years to repay the loan. Because the lender has more risk, the interest rate on an unsecured loan ranges from 9% to 45%.
With a revenue based business loan lenders extend credit on the basis of your farm’s revenues, rather than your credit score. When qualifying for the loan, the lender will look at monthly revenues to determine if you meet the minimum threshold of $10,000.
Revenue loans are typically funded by a direct deposit into your bank account. After the loan is funded, the lender will take their repayment as direct withdrawals. They could utilize a lockbox for this purpose.
Revenue based loans also require at least three months in business and a minimum credit score of 530.
No matter how well you budget or plan, emergencies arise. You can’t predict a late night veterinarian bill, unexpected flooding, or broken machinery. Access to capital can mean the difference between getting your business back on track or failure.
Emergency business loans have a quick application process and fund quickly to keep you from going under. Because the lender has less time to perform underwriting, you’ll pay a higher interest rate (sometimes up to 45%). But the loan can be approved and funded in as little as 24 hours.
Most emergency business loans require at least two months in business and a minimum credit score of 500.
The best business loan for your farm, ranch, or agribusiness, can help you continue down the path of success. Reach out to Shield Funding today to speak to one of our loan specialists about meeting your capital needs.
