In over thirty years of financing agricultural I have originated farm loans, agricultural land loans, Ag Land purchase loans, and dealt with a host of Farm Loan Programs. Some of which have been government programs and others programs we have established in our bank. In the banks I was affiliated with the farm loan programs were the most popular.
Most of the long term agricultural land loans before the late 1980s were originated by the Federal Land Bank and some Insurance companies. Then during the farm crisis of the late 80s Farmer Mac was started. The purpose was to be able to poos and secure ag land purchase loans and sell just as Fanny May was doing with home loans. Now the Federal Land Bank is known as Farm Credit Services and is making long term agricultural land loans, along with Farmer Mac, and some insurance companies.
Interest rates tend to be usually 2 or maybe more points higher for these commercial farm loan programs. The rates would be on a par with other commercial long-term loans. Long term loans would be defined as loans with an amortization of 25 years or more.
The Agricultural Banks would be primarily in the rural areas and tend to be smaller banks. However, with the amount of money needed by these larger farming operations these small banks sometimes must rely on larger city banks to assist them with the farm loan programs.
Financing farmers and agricultural enterprises is challenging for agricultural banks. Getting adequate security on farm land loans is not difficult as you can take a mortgage on the land and be secure.
However, getting a secure position while financing livestock, machinery, and growing crops is more difficult. Unlike automobiles large pieces of equipment do not require titles that you can hold. You only must rely on serial numbers posted on the equipment etc.
Financing agricultural with various forms of agricultural land loans, farm loans, and ag purchase loans has been challenging over the past 30 years but enjoyable.
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Long Term Agricultural Loan | A Complete Guide
Finally, we have found a sustainable but also more innovative way to help farm businesses to succeed in the long-run. Long term agricultural loans have become one of the financial tools that can benefit farmers in today’s agricultural industry as man’s demand for food and agro-allied products continues to increase. The fact that you can be given a credit with many years to complete the payback allows you to keep the value of the installments to a minimum, hence, giving loan and mortgage takers plenty of time to get off it. First, let’s start with the basics!
What Are Long Term Loans?
Long term loans are a type of business financing in which the loan expiration date extends beyond one year and can even last up to 30 years (for example, agricultural and commercial real estate loans). It is mainly used to finance long-term projects, such as business expansion, franchising, property purchases, equipment, and other fixed assets.
What Is A Long Term Agricultural Loan?
A long term Agric loan is a type of mortgage loan which existing or prospective farmers, as well as agricultural entrepreneurs, can use to launch capital farm renovations or maintenance and/or fund the purchase of their farmlands, machines, etc.
What Are The Advantages Of Long-Term Loans?
Would you like to see reasons to get on a long term loan project with United Farm Mortgage? Continue reading!
- Longer repayment period
With a longer payment period, you will not be so pressured to pay the total loan amount quickly. However, this does not mean you should neglect the monthly payments and get them out of your minds. As it is a long-term expense, there’s the plan to deal with the debt, but gradually.
- Lower interest rates
Long-term loans generally have lower interest rates than short-term loans. This is because the request for financing is much more rigorous since it implies a greater risk and also more money.
- You can finance significant expenses
The goal of any business is profit, and with that, comes the ability to scale or grow. When you start a business, you cover many parts of the company. However, as your business grows, you will have to hire people to work with you.
The more your business scales, the more expenses you will have to cover, and some of them will be very expensive. For example, if you need to automate the harvest of a farm product with a harvester, you will have to buy the machinery, which can come with a very high price. However, by getting long-term loans, you will be able to finance the high-value expenses that this acquisition entails.
What Are The General Disadvantages Of Long-Term Loans?
- More total interest
Even if interest rates are lower, with long-term loans, you will still have to pay more in interest, because the amount you will borrow is greater than the amount that can be provided with short-term financing. However, this total interest is spread over a long period of time.
You must assess the individual situation. You may be paying more in total interest, but if the expense is an investment and leads to more sales or farm harvests (for example, buying machines to produce more units), then a longer-term loan is the best option to grow the agricultural settlement.
- Limited monthly cash flow
Although the time to pay it will be longer, you have to make regular payments. With these regular payments, you can restrict your cash flow.
- More rigorous application process
Since the amount of long-term loans is much larger than the amount provided by the loan in a shorter time, lenders will be at greater risk. To minimize this risk, the application process is more decisive in eliminating those applicants who do not have the credit history or the ability to pay the debt.
How to Get a Long Term Loan
Long-term loans are most difficult to obtain for start-ups. In general, only businesses established with some years of financial success are approved for long-term bank loans. For approval, your company must have a business plan and several years of historical financial statements in order to obtain financing of this type.
In addition, you have to prepare forecasted financial statements to show that you can pay. Before a small business looks for a long-term loan, you should always compare the cost of it with the lease of the asset you want to finance. The interest rates of a long-term loan are usually a few points higher than the interest rates of a short-term loan in a normal economy.
If you are aware of the preferential interest rate, you can add some points to that and find something close to the interest rate that the financier will charge you. Those few points will reflect how risky they feel to the company. The more risky it is, the more points it will add to the preferential interest rate. When assessing risk, creditors will make the 5Cs of credit analysis of the long term loan seeker, which are the character, capacity, capital, collateral (or guarantee), and conditions.
When Should You Obtain Long-Term Loans?
- When your business is solvent
Long term loans are more accessible to business establishments that have proven themselves, increasing sales and having sufficient cash reserves that are characteristic of larger companies. As the lenders want to minimize the risk, they will lend to those who have the ability and the history of returning the money.
Small and newly created companies or farms are at a disadvantage with this type of financing since they do not have the history or credibility yet because they have just begun.
- When you need to borrow extends beyond one year
If you are requesting financing because your project will last several years, long-term loans are the best option compared to short-term credit. This is because they provide the amount and period of validity best aligned to the purpose of your credit.
You will not be able to buy, set up farmland and equip it with needed machinery with a short-term loan. In the same way, you cannot use a longer one to pay workers’ salaries during the month. You will end up spending excess funds unnecessarily.
- Have an actionable payment plan for the long term
If you do not have short and long term plans to pay off your debt, this could have detrimental effects on the business. Irregular payments will end up making you pay more in interest. But if you keep making regular payments, you will not have to spend more.
5 Questions to Ask Before Applying for a Long Term Loan
- What is the interest rate of the loan? This largely defines what your payments will be during the course. It is important to consider the interest rate when calculating what your monthly payments will be. In this way, you will know exactly what kind of interest rate you will have to aim for when you request it.
- Is the loan secured or not? Secured loans require collateral and usually have lower interest rates compared to unsecured ones, which do not require it.
- How much is the loan amount? The amount you can borrow depends on several factors such as your credit score, what you need the funds for, your ability to provide adequate collateral, annual income, and monthly expenses.
- Can you pay the loan early? Payment flexibility can be important for you even if you want a long-term loan. You may get some cash and want to make additional payments or decide to pay it in full before the original payment date.
- What are the loan charges and other charges? You must review your contract to get a complete list of the charges you must pay. Some loans with longer terms have maintenance charges and other small charges that can quickly accumulate to make the credit much more expensive.
Do you run an agricultural settlement and you would like to expand the business base in the years to come? United Farm Mortgage offers farm and ranch establishment’s varieties of low-interest loan propositions, including a long term agricultural loan, which can be spread out up to a 30-year period. Contact us now and begin your journey to actualizing your dreams.