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February 5, 2020

How to Qualify for a Farm Loan When You Have Bad Credit

Your credit score matters—but it shouldn’t keep you from securing the financial support your farm needs.

There are many reasons that you may need a farm loan. Perhaps you want to expand your operation by purchasing more land, or maybe you need to invest in new technology to optimize your production capabilities. Whatever the case may be, it’s likely that at some point your operation will need more working capital to sustain the fast-pace demand of food production.

Credit Score Primer: How Lenders Make Decisions with Your Credit

A borrower’s credit score is one of the most important factors that is considered when applying for an agricultural loan. A credit score is the result of an exact formula that takes a variety of financial factors into account: how much credit you have, how much of your available credit is in use, your history of paying back your loans, and the length of time you’ve had loan accounts open. The score lets lenders quickly determine how well you’ve handled your financial business in the last seven years.

Late or missed payments on credit cards, mortgages, and loans will lower your credit score. Likewise, using a large percentage of your available credit will also lower your credit score. Conversely, credit card accounts, loans, and mortgages with a long history of on-time payments and a low credit utilization percentage will improve your overall credit score. Lenders are more likely to approve a loan if your credit score is high because such a score means you are more likely to pay off the loan in a timely manner.

Credit Score Values

Credit scores typically range from 350 to 800.

  • Excellent (>720) – These are the borrowers who will most likely receive the best interest rates and the most attractive loan terms.
  • Fair (660-719) – These borrowers aren’t the most desirable for lenders, but they are still acceptable.
  • Poor (621-659) – These borrowers will find loans, but they typically come with high-interest rates. It’s a trade-off that lenders insist upon to offset the risk they are taking by extending credit.
  • Bad (<620) – This low of a score is often considered too risky for traditional lenders.

How Your Credit Score Affects Where You Should Apply for a Loan

Depending on where you fall on this credit score spectrum, you may have a difficult time qualifying for a traditional bank loan. Traditional lenders usually require excellent credit. They also look at how long you’ve been in business and whether you’re bringing in enough revenue to service the loan amount you’re looking to secure. In short, most conventional banks are not a viable option for smaller businesses or for those with less-than-optimal credit scores.

Non-traditional lenders, like AgAmerica, are a bit more lenient than banks when it comes to credit requirements for a farm loan. They also utilize a more streamlined underwriting process and have a much quicker turnaround time for loan approval than banks. Alternative lending is more flexible and caters to smaller and medium-size agribusinesses. With higher approval rates and an easy application process, alternative lending can take on many forms, including term loans, invoice factoring, a line of credit or merchant cash advance, to name a few.

Building Credit Over Time

While most alternative lenders look at a variety of components during the loan application process, there’s no denying that your credit score is factored into your loan approval and loan terms. A lower score will mean higher interest rates—but when you use alternative financing, the terms of the loan are usually between one to five years, which gives you a great opportunity to build a better score by making regular payments. At the end of the loan term, however long or short it may be, your proven payment history and higher credit score should position you for a more conventional product with a longer amortization period and lower interest rate.

Here are additional steps you can take to build your credit over time:

  • Pay statement balances in full when possible.
  • Use a credit-monitoring service, like Credit Karma, which helps you monitor your report for errors and gives you tips for improving your score.
  • Try not to exceed 30 percent of your spending limit (and make sure you know what your spending limit is).
  • If you do have to carry a balance from one statement to the next, pay it down as quickly as possible.
  • Use your credit accounts regularly but relatively lightly—spread out your purchases across different credit accounts.

How to Qualify for a Loan with AgAmerica Lending

Our team has a deep-rooted respect for the work that you do, and as so, we are committed to building a custom solution for your operation that will see you through the tougher seasons and thrive during the good years. We understand that your credit score is just part of the formula—we look at your operation as a living entity, not just a snapshot in time.

At the start, we take the time to get to know about your history as an operator; how your operation works; what barriers you’ve faced historically and today; who the people are that depend on you; and what long-term goals you’ve set. By sharing this information with our team, you allow us to focus on your strengths while offsetting any weaknesses, such as a low credit score. For example, when we look at your debt schedule, we’re not just focused on your debt and liabilities, we acknowledge that they are contributions to your future earnings. Unlike traditional lenders, we use these investment debts to leverage your operation’s financial narrative.

To learn more about our farm loans and alternative lending, visit our Accelerate Loan Program.

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