How does a beginning farmer secure their first farm loan? A farmer may wish to purchase equipment using a loan instead of taking on expensive credit card debt for cash flow until harvest brings cash. Most lenders seek similar business information to analyze when considering beginning farmer credit worthiness.
Short-term loans are used to finance seeds, fertilizers and/or other annual inputs. This can include cash to help farmers pay their farm and/or personal bills between harvests. Short-term loans are under a year and are repaid after harvest. Intermediate-term loans help farmers purchase capital equipment like tillers, tractors, coolers and have repayment terms up to seven years. Long-term loans for farmland may extend to 30 years.
Gary Matteson of the Farm Credit Council and Benneth Phelps of the Carrot Project shared their recommendations on planning for obtaining credit in a workshop for beginning farmer educators at the Beginning Farmer Learning Network Conference in late 2014.
Phelps and Matteson identified the key to success for beginning farmers is to develop good recordkeeping habits their first year. Records are crucial to developing realistic plans for future years and assessing how to improve operations. New farmers should reach out to neighboring farmers, Cooperative Extension staff, farm lenders and other agriculture professionals. Build a network of agricultural experts to help with farm challenges and share best practices.
General Loan Requirements
Lenders need to see an ability to repay loans. For most lenders, farmers will need at least:
- A personal credit score over 660
- Cash down payment and/or collateral
- Earnings to cover living expenses and loan payments (new and any outstanding loans)
- More than 30% ownership or equity in the farm business
- Less than 30% of earnings spent on debt payments (credit cards, student loans, other loans)
- A simple Business Plan, Income Statement and Budget – Download editable templates for a 1-page Business Plan, 5-Line Budget here. See more business planning tools here.
Most farm lenders seek demonstrated farm training and experience (minimum two years farm apprenticeships, Ag. college program). Many lenders seek at least one year of experience managing a business. A good Marketing Plan and Risk Assessment Plan demonstrate a strong grasp of business and work in the farmer’s favor. (Learn more about these plans in Part 2)
Simple Business Plans
Beginning farmers need at least a basic Business Plan to guide farm operations and to apply for a short-term, cash flow or seasonal loan. Even the simplest Business Plans should sufficiently explain the business to someone who has never visited the farm or seen its operation. Business Plans include have a Mission, Objectives, Goals and Action Plans with a monitoring schedule and contingencies.
The Mission guides every business decision. Matteson recommended farmers “keep it simple. “Find the core definition of your business.” Develop four to eight objectives that describe what the business should look like in the future. Objectives are general, observable, challenging and business directions. Focus on a few objectives that work towards the farm mission.
Matteson recommends developing SMART Goals with deadlines (Specific, Measurable, Attainable, Rewarding and Timed). He said, “A goal without a deadline is just a dream!” Set several goals for each objective. Some goals may apply to multiple objectives.
Phelps pointed out that each goal needs a precise Action Plan or tactic with its “5 Ws:” Who will be in charge of What? When will a milestone will be due and Where and How (or How often) will activities take place to achieve each goal? Successful Action Plans have regular monitoring schedules, comparisons to appropriate baselines or standards and plans for corrective action as needed.
5-line Income Statement
Last year’s records offer a good starting point for a modest 5-line Income Statement. The purpose of a 5-Line Income Statement is to reduce to simplest terms the financial goals of the farm business so those goals can be remembered and acted upon. The basic 5-Line formula is Sales – Cost of Goods Sold = Gross Margin – Overhead = Profit.
- Line 1) Start with Sales (last year’s total in dollars)
- Line 2) Subtract Cost of Goods Sold (COGS). Expenses that lead to another unit of output. This includes production labor, payroll expenses, workman’s compensation, unemployment taxes, FICA, Medicare, health insurance, seed, fertilizer, amendments, soils, trays/pots/containers, pest and weed control, animal feed. These items are used up in less than a year.
- Line 3) Gross Margin (Sales minus COGS)
- Line 4) Overhead – any expense incurred regardless of production volume. Include the “DIRTI” Five: Depreciation, Interest, Repairs, Taxes, Insurance. Include farm managers’ and bookkeepers’ wages/salaries, farm marketing and utilities. Equipment like fencing, irrigation systems, trucks, coolers, or barns have a useful lifespan longer than one year making them part of Overhead. Depreciate a portion of their costs over the useful lifespan of the item, such as an irrigation system being depreciated or “written off” over a 5-year life span.
- Line 5) Profit (Gross Margin minus Overhead)
In a second column, calculate the percent of sales for each line. (Dollars divided by total Sales in Line 1.) Use these percentages to help determine the Sales needed to Break Even. See more instructions and examples at http://foodshedguide.org/planning
First-year farmers can use these standard baselines to help set initial budgets:
If using national or regional numbers, adjust for local costs and potential production levels as well as any known trends. Land rents and production capacity vary considerable across the country.
Develop a simple annual budget with these elements
- Estimate the Owners Draw (amount farmer and family need to earn from the operation to live on, plus income taxes)
- Any Loan Principal payments due that year
- Total Profit Required (Line 1 + Line 2)
- Overhead expenses (see Line 4 in Income Statement above. Overhead expenses should be stable year to year, except for significant expansions or business model changes)
- Gross Margin Required (Line 3 + Line 4)
- Divide by Gross Margin Percentage (see Line 3 in Income Statement above)
- Break Even Sales required (Line 5 / Line 6 as percent of Historical Sales. See Line 1 in Income Statement above. This is amount of sales needed to support the overhead obligations and profit requirement.)
Double-check numbers and then “gut check.” Will the target market support this sales volume, especially for an unknown beginning farmer? Will the available land produce enough output (crops or livestock) at sufficient quality to command these market prices?
If planning for a new farm business, describe how to achieve goals and finance operations until sales build. Will the farmer or a partner have off-farm income, use credit card debt or other loans or dip into personal assets?
Ask a neighboring farmer, Cooperative Extension staff or other agriculture professional to review your plans and make suggestions for expanded versions. If the budget and plan numbers work and meet other general requirements, a farmer could be ready to visit a loan officer for advice or to apply for a farm loan.
See Part 2 of this story coming soon.
Gary Matteson is Vice President for Young, Beginning, Small Farmer Programs and Outreach at the Farm Credit Council in Washington, DC. Send questions to him at email@example.com. Benneth Phelps is Loan and Outreach Coordinator at the Carrot Project in Somerville, MA. Contact her via email to firstname.lastname@example.org or call (978) 290-2220.
Find more Beginning Farmer Resources at here.
The Northeast BFLN is managed by Cornell Small Farms Program and was funded by the USDA Beginning Farmers and Ranchers Development Program. The BFLN facilitates peer learning and collaboration among groups who serve Beginning Farmers to strengthen the support network for new farmers. BFLN Conference participants included beginning farmer service providers representing extension services, organizations and government agencies across nine states.
A similar story ran in Country Folks and Country Folks Grower.