Beginning farmers can secure their first farm loan if they develop a plan for how the money will be spent, and how the loan will be repaid. A plan can allow a farmer to purchase equipment using a low interest cash flow loan instead of building expensive credit card debt to finance farm operations until harvests bring income.
Before visiting a lender, gather and review personal financial records and farm business documents. Verify your credit score is high enough. Correct any typos and math errors to present a strong case.
Gary Matteson of The Farm Credit Council and Benneth Phelps of the Carrot Project shared their recommendations on planning for farm credit in a workshop for beginning farmer educators at the Beginning Farmer Learning Network Conference in late 2014.
Simple Business Plans
Beginning and experienced farmers should have a basic Business Plan as operational guides. Review these plans before applying for short-term loans (for cash flow or seasonal needs) or long-term loans (for capital equipment, land or buildings). The simplest Business Plans help explain the business to someone who has never visited the farm or seen its operation. Business Plans must have a Mission, Objectives, Goals and Action Plans with a monitoring schedule and contingencies.
Matteson described common mistakes made by beginning farmers.
- Not viewing their farm or farm project as a business
- Not writing a business plan
- Assuming 100% sales at highest possible value
- Leaving out or ignoring potential costs or losses (crop failure, farmers’ market leftovers, disease or pest damage, etc.)
- Allocating past expenses to future budgets
- Mixing capital/long-term expenses or loan payments into cash flow projections
- Not maintaining thorough records every year
- Not seeking the opinions of ag. professionals, neighboring farmers, Cooperative Extension staff, etc.
- Not taking feedback, advice or criticism well
Farmers should double-check income statements and budget numbers and then “gut check” everything. Be sure target markets will support projected sales volume for a new, unknown farmer. Tap into agriculture professional networks to verify that the available land can produce enough output (crops or livestock) at sufficient quality to commend these market prices.
Develop a Marketing or Action Plan to help achieve that level of sales. Products must sell to pay farm bills. Create an “elevator speech” or tag line that briefly describes your farm’s unique offerings. Develop a Marketing or Action Plan to help achieve that level of sales. Show how you will sell next year and earn enough to live on and pay back the loan. Revise the budget until the plan is sound.
Risk Management Plan
Matteson recommended a simple spreadsheet and offered a sample template with five rows:
- Identify – potential risks to farm business (drought, late/early frost, pests/predators, disease, accident/illness, theft, competition, not getting in to best farmers markets, etc.)
- Prioritize – risks with the biggest negative impact(s)
- Evaluate – risk management tools available (Best Management Practices, irrigation systems, scouting, key man insurance)
- Select – strategy/strategies to mitigate risk
- Review – did strategy work? Monitor results and adjust as needed
For each Risk and five steps above, identify the impacts and potential solutions to minimize or mitigate risks for each of these categories: People, Financial, Production, Marketing and Legal.
View a webinar explaining one Risk Management Planning tool here.
The Carrot Project offers a sample business and marketing plan with risks and threats here. See additional Risk Management resources at the bottom of that webpage.
After developing basic 1-page plans, gut check everything. Ask a neighboring farmer, Cooperative Extension staff or other agriculture professional to review your plans and make suggestions for expanded versions. If the budget, plans and credit score are sound, a farmer could be ready to visit a loan officer for advice or to apply for a farm loan.
Potential Funding Sources
- Farm Credit – Like a credit union for farmers, Farm Credit makes short, intermediate, and long-term loans to farmers, forestry producers, fishermen, farm-related service businesses and cooperatives. Farm Credit does not report payment histories to national credit reporting agencies. Agents understand that crops can fail, weather happens, etc. As long as farmers are communicating with their agent, payment terms can be negotiated. Farm Credit has several programs to help beginning farmers get started, such as FarmStart. FarmStart provides working capital investments of up to $50,000 to get their business off the ground. It is available in New England, New York, and New Jersey. Learn more here.
- Farm Service Agency (FSA) This branch of USDA offers microloans for beginning and experienced farmers up to $30,000 for start-up expenses, seed, fertilizer, utilities, land rents, marketing and distribution costs, living expenses, livestock, equipment, wells, coolers, hoop houses, irrigation or delivery vehicles. FSA also offers qualifying beginning farmers special rates and terms on farm ownership loans. Find a local office and agent here.
- National Council or State Agricultural Finances (NCOSAFP). Aggie Bond programs in 19 states help beginning, first-time farmers purchase land, farm equipment, farm buildings and breeding livestock through reduced interest rate loans. Learn more at www.stateagfinance.org/directory-of-state-programs
- Local Farm Incubator Projects – examples include New Entry Sustainable Farm Project (http://nesfp.org) or Southside Community Land Trust (http://southsideclt.org/urbanedge)
- Small Business Development Centers – offices around the country offer business planning assistance for free or at low cost. Some offices have agricultural expert. Find a local contact at www.sba.gov/tools/local-assistance/districtoffices.
- State and Federal Department of Agriculture Grants – contact local Department of Agriculture or USDA’s Natural Resource Conservation Service (NRCS) office for more information on technical assistance and cost sharing opportunities.
- Personal loans – traditional banks may lend to beginning farmers, but often have higher interest rates than FSA loans
- See more funding opportunities and a long list of potential lenders here.
See Part 1 of this story.
Matteson and Phelps led a workshop at the Beginning Farmer Learning Network (BFLN) Conference held in Albany, New York in late 2014. 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 firstname.lastname@example.org. Benneth Phelps is Loan and Outreach Coordinator at the Carrot Project in Somerville, MA. Contact her via email to email@example.com or call (978) 290-2220.
Find more Beginning Farmer Resources 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.