Transcript Farm Loan Basics - Connecticut Farm Bureau

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
Flavors of Capital Funding
Debt Capital
Equity Capital
Borrowed money,
repaid in the future,
Owed to creditor
Ownership stake,
yields $ (dividend) to
shareholder, typically
held as an
investment
Where Capital Comes From
Debt Capital
Loan
Credit card
Pawn shop
Specialty Capital
Grants
CSA shares
Equity Capital
Your savings
Mom and Dad
Sale of stock
Neighbor helping out
Angel Investor
What is Constructive Credit?
 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
Constructive Credit is not:
 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.
Obtaining Constructive Credit
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
Relationship Lending works
both ways
For you to be a valuable partner:
 Business plan
 Accurate financials
 Honest and ethical relationship
For a lender to be a valuable partner:
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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
Getting Ready
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
Preparing for Success
 Draft a Realistic, Written Business Plan
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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
The Five Cs of Credit
 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
A+J Enterprises, LLC
Preliminary Analysis
Assets
Cash
Inventory
Other Current Assets
M&E/ PP/ Vehicles
Retirement Accounts
Real Estate
Total Assets
Liabilities
Current Liabilities
Credit Cards
$1,000
$1,000
Car Loan
$9,000
Net Worth
Net Worth %
Working Capital
Earnings
Sales
Variable Expenses
Gross Margin
Fixed Expenses
Net Earnings
Off Farm Income
Family living
CADSNI
Debt Service
Cash Excess
Proposed debt
Proposed Excess
$3,000
$3,000
$4,500
$15,000
$4,500
$120,000
$150,000
$90,000
60%
$8,500
$45,000
$31,950
$13,050
$6,750
$6,300
$45,000
$30,000
$21,300
$13,000
$8,300
$5,000
$3,300
Mortgage
Total Liabilities
$49,000
$60,000
Sources of Debt Capital to US
Agriculture
 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
I Need Help to Figure
this Stuff Out!
 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
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”
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.
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.
Guaranteed Loan Program
• Farm ownership
• Operating
• Conservation loans
Direct Loan Program
• Farm ownership
• Operating
• Emergency
• Conservation loans
Farm Loan Programs Information Chart
Type of Loan
Maximum Loan Amount
Rates and Terms
Direct Farm Ownership
$300,000
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Term: Up to 40 years
Interest rate: fixed**
Direct Down Payment
The lowest of the following:
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 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
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Term: 1 to 7 years
Interest rate: fixed: **
Direct Emergency
The lowest of the following:
 100% of actual or
physical losses
 $500,000
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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**
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Guaranteed Farm Ownership
The maximum loan amount is 
adjusted annually for
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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
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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
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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
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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.
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
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Farming Experience
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Owner, manager or operator of farm business for
minimum 1 production & marketing cycle
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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
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Raised on farm, management decision-making
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Employed as farm manager or farm management
consultant for minimum 1 production & marketing cycle
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Finance modest, income-producing, agriculture-related,
educational project that falls under authorized loan purposes
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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
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Maximum Loan Amount is $5,000
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Rates and Terms
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1 – 7 years, depending on loan amount and security
Direct OL interest rate
FSA Youth Loans
• 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
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FSFL Program Purpose
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Provides low interest financing for producers to build or upgrade
farm storage and handling facilities to store the commodities they
produce.
Eligible Commodities
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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-thanwhole grain
Pulse crops - lentils, chickpeas and dry peas
Hay
Renewable biomass
Fruits, Nuts and Vegetables - cold storage facilities
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Maximum Loan Amount
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Loan Process
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Maximum loan amount of $500,000
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
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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
The Farm Service Agency (FSA) developed
the Microloan (ML) program to better serve
the unique financial operating needs of
beginning, niche and the smallest of family
farm operations. Examples might include; direct
marketing to restaurants and grocery stores,
organic production, community supported
agriculture (CSA’s) and farmers markets.
 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 largerscale operations;
 Assisting the agricultural community by creating opportunities to
start new businesses.
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.
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.
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.
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.
o 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.
 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.
 Provide some flexibility in loan security;
 Assist the agricultural community by creating opportunities
to start new businesses;
 Fulfill financial operating needs of
beginning, niche and the smallest of family farm operations.