Understanding the ins and outs of securing farm credit can be complicated. It’s important that credit be managed as closely and as carefully as possible. Fortunately, credit options are changing and expanding, providing borrowers with more alternatives to better manage their agricultural financing.
So, how does a borrower go about evaluating farm loan options?
First, it’s necessary to establish short-and long-term financial goals for the agricultural operation, combined with a solid plan to meet those outlined goals.
Next, to ease the process of securing a farm loan, it’s helpful to understand the language of ag lending.
To help you out, here are some must-know, introductory lending terms:
- Short-term agricultural loans: These farm loans are commonly used to finance operating expenses. Loan maturity usually matches the duration of the agricultural production process (3 to 18 months).
- Bridge loans: This specific type of short-term loan is used until a borrower secures permanent financing or removes an existing obligation. This type of loan allows the farmer to meet current obligations by securing quick cash flow. The loans are very short (up to one year) with relatively high interest rates and are supported by collateral, such as real estate or inventory.
- Intermediate-term loans: These ag loans are used to fund depreciable items such as machinery, equipment, breeding livestock, and farm renovations and enhancements. What’s more, intermediate-term loans are typically used to re-work a borrower’s balance sheet to allow for additional working capital. Ag lending companies often call them capital, or installment, loans. Typically, these loans extend from 18 months to 10 years.
- Long-term loans: Used to acquire, construct and develop land and buildings, these loan types are usually amortized over periods beyond 10 years. Lenders may describe them as real estate loans because they are usually secured by real estate.
- Fixed rate loans: A fixed rate loan holds the same interest rate until the loan is fully paid. A variable or adjustable rate loan (see below) is different in that the interest rate changes based on market rates of interest, a specified index, or other variables determined by a lender.
- Adjustable rate loans: Farm loan rates on adjustable rate loans can only fluctuate at intervals designated in a loan agreement. For example, the interest rate on a 3-year adjustable rate loan can only change one time every 3 years.
- Variable rate loans: These loans designate intervals in which interest rates may shift, but in some variable rate loans, a change in the interest may be lender-determined. If a farmer has a variable or adjustable rate loan, he or she should be aware of the frequency at which the amount of interest may change.
- Loan agreement: This is a written agreement between the lender and the borrower outlining the terms, conditions, and restrictions associated with a farmland financing transaction.
Questions on ag loan options? Contact Bankers South!