Farm loan rejection rates have been on the increase in the US, with about 42.9% of banks rejecting farm loan applications in 2018. This is mostly because of weak farm income recorded by farmers submitting applications for loans.
As a result, farmers looking to obtain loans for their farm businesses need to take extra precautions to ensure that they secure the loans they need. Therefore, if you’re a farmer with an urgent need for a farm loan, here are key steps you need to follow to ensure you secure a farm loan.
5 Key Steps To Ensure You Get The Loan For Your Farm Business
Identify The Why
Before looking for a loan or a lender, you first need to identify the reason for the loan. This can be to cover periods of cash flow deficit or procure livestock or machinery for your farm. Most farm loans that banks and other commercial lenders approve typically fall under the following categories:
- Short-term loans: This type of loan is obtained to procure livestock, machinery, or other equipment that might be essential for running the farm. Short-term loans are repaid within a 1 to 7-year period.
- Long-term loans: These are used to procure land needed for farming or animal-rearing activities and are repaid within a 7 to 20-year period.
- Working capital: Working capital loans are obtained to cover periods of cash flow deficit within a farming session. They are typically repaid within 6 months to 2 years or at the end of the farming session.
If the reason for your loan falls within any of the above categories, it will improve your chances of getting approved for a farm loan. However, if your reason is outside of these categories, your best bet would be to look at alternative funding sources like credit cards.
Make Sure You Meet The Minimum Requirements
Once you’ve identified the reason for your loan, the next step is to check that you meet the minimum requirements of any lender. These requirements are:
- Ability to repay the loan: Your ability to repay the loan is a major factor that can make or mar your chances of success. You have to demonstrate that your business can make enough income to support the monthly loan payments and cover the farm’s daily operations. This can be demonstrated by providing documents showing the financial history of the farm business.
- Collateral: Lenders usually require some form of collateral before they grant you loans. This collateral helps to mitigate the risk they incur when they issue loans to business owners. The preferred form of collateral for long-term loans is land or landed properties that can cover the loan amount you require. However, for short-term loans, the machinery procured with the loan amount can serve as collateral as it can be easily repossessed should you default on the loan.
- Credit history: Your credit history gives the lender insight into how trustworthy you are in terms of paying back loans. Lenders want to ensure you have a good history of borrowing and repaying loans. This information is often gleaned from your credit score. As a result, you need a good credit score of 660 and above to secure a farm loan for your business.
That’s not to say that securing a loan with a bad credit score is impossible. In fact, most lenders that offer DSCR loans and farm loans would rely more on your farm business’s DSCR score (ability to repay the loan) and your collateral to evaluate your eligibility for a loan.
These are just the basic requirements that each lender might need. Nonetheless, remember that the requirements vary from lender to lender as some lenders might require additional documents while others might stick to just the basic requirements.
Shop Around For A Lender
Getting a loan is one thing; however, getting a good loan with favorable terms and conditions is a different ball game entirely. As a business owner, your goal should not just be to get a loan but rather a loan uniquely suited to your business needs.
This means shopping around different lenders to see who has the best rates and repayment terms. This step in the process can seem tedious because of the amount of research, calls, and leg work involved, but the end result is usually worth it.
You can start by checking out our farm loans at United Farm Mortgage. We have a variety of loan packages that cover various farm businesses, including alternative farming. You can also search for other lenders offering farm loans and compare rates and terms.
While looking for a lender for your farm business, keep in mind that not all lenders are knowledgeable about the farm business and, as such, might not be able to provide you with the resources and support needed to take your business to the next level.
Prepare The Necessary Documents
Once you’ve found and settled on a lender, the next step is preparing all the necessary documents for the loan. These documents should be able to show the following:
- Minimum Credit Score of at least 660
- Minimum Loan Amount of $400,000.00. This can vary across lenders and loan types.
- Minimum Acreage of 40 acres of farmland
- Business plan
- Location of the property
- Income of the business; its financial state, including debts
- Collateral or down payment of at least 30%
- At least 30 percent equity on the property to make refinancing possible
- Total assets owned, including equipment and farm buildings. This will be used to calculate the debt-to-asset ratio of the business.
Depending on the lender, you may be asked to bring additional documents apart from the ones listed above. Nevertheless, it’s always best to be proactive and ask the lender for their list of requirements. That way, you can avoid any delays that might occur as a result of back-and-forth communications and requests.
At this step, all that’s left is to sit back and wait for the approval message from your lender. Once your loan has been approved, ensure you deliver on your business plan and make your monthly repayments promptly. This would put you in good standing with the lender and make it easier to qualify for and secure a loan in the future.
Secure a Farm loan today
Getting a farm loan with bad rates and repayment terms can cause more problems for your business than you hoped to solve. It can result in great debt and even put you at risk of losing your business. That’s why it’s important to work with a lender that’s conversant with the nuances of the farming business.
United Farm Mortgage has various loan packages tailored to farm owners’ unique needs. We have been in the agricultural sector long enough to know what works, and we have the resources to help you grow your business.
We also offer competitive rates and the best repayment terms in the business so that you can comfortably focus on running your business without being weighed down by your loan responsibilities.