How to Qualify for an Agricultural Loan

What is an agricultural loan?

An agricultural loan is a funding option designed to help farmers and ranchers run their operations more efficiently. Managing the costs of running farms and ranches can be uniquely challenging, so farmers often need low-interest agricultural loans to help them stay afloat. Fortunately, the government often steps in with low-interest loans and other subsidies that help farmers turn a profit.

Approved borrowers can use agricultural loans to do the following:

1. Purchase farmland: Whether you’re just starting out as a farmer or wish to expand your current farm or ranch business, agricultural land loans can help you purchase the land you need to build an excellent operation.
2. Cover operating expenses: Many farmers need help covering their operating costs, including acquiring machinery and equipment, and an agricultural loan can help them do this. 
3. Cover marketing expenses: Farmers must sell their products to make a profit. To do so, they need an effective marketing plan — and the money to pay for marketing costs.

How do you qualify for an agricultural loan?

To qualify for an agricultural loan, you’ll need to take the following steps:

1. Contact a lender (and have a good credit score).

Every lending institution has distinct requirements to qualify for any specific loan program. One of the first things a lender looks at is your current business credit score. For example, FarmLoans.com requires borrowers to have a minimum credit score of 660 from at least one of the three major credit reporting bureaus. The lender may also ask for a business plan before considering you for an agricultural loan.

2. Know which type of agricultural loan you want.

The Farm Service Agency (FSA) has dedicated officers to review applications for agricultural loans. The officer reviews the applicant’s eligibility based on what type of loan they want. For instance, those who wish to apply for a farm ownership loan must have a minimum of three years of business operations experience on a farm or ranch.

Similarly, those seeking a farm operating loan must meet the FSA’s education, on-the-job training or farming experience requirements. Beginner farmer loans ask that the farmer or rancher have less than 10 years of farm operation experience.

3. Familiarize yourself with all types of agricultural loans.

Agricultural loans aren’t a monolith, and the above loan types are only a small piece of the pie. FSA loans are also available for those who require assistance with only a down payment for a new farm. In this case, the applicant must be able to produce a cash payment of at least 5 percent of the purchase price.

Agricultural loans are also available for those who currently own a farm and need emergency funding. For example, if the farm is located in a designated disaster county and the farmer has suffered a production loss of at least 30 percent, an emergency loan may be granted.  

How to apply for an agricultural loan

Farmers have several different places to turn to when in need of an agricultural loan.

• Apply for an agricultural land loan from a major bank. When farmers need financing, most turn to their local banks first. It’s often easier to get a business loan application approved when dealing with a bank you typically do business with. If your credit is good, you should be able to get an affordable interest rate on your loan.
• Apply for direct and guaranteed loans for farmland from the government. If you do not qualify for a traditional loan, you don’t have to sell the family farm. Government agencies aim to help farmers get the cash they need to be profitable. The FSA offers loans to farmers to help cover costs. For example, direct ownership loans help farmers purchase the land and livestock they need to start, while direct operating loans help cover equipment and other farm operating costs. Additionally, The National Council of State Agricultural Finance Programs has more information on agricultural loan programs.
• Look for agricultural home loans to purchase a home and farmland. If you want to purchase land to run a farm, several loans will apply directly to you. Housing and Community Facility Programs, operated by the government, offer loans to families who wish to live in rural areas. Farm Credit Services also provides loans for homes in rural and agricultural areas. 

Tips on how to get a farm loan with bad credit

While it can be a huge hurdle, you can still get a business loan with bad credit. Consider the following strategies: 

1. Find low-credit agricultural lenders.

Prospective farm owners can search for companies and alternative lenders that lend to those with poor credit. Although good credit earns you better interest rates, lenders still approve those with bad credit, albeit with higher APRs and stringent repayment terms. Once your credit score improves, you could refinance the loan at a lower rate.

2. Gather proof of your farming experience (and be prepared to present it).

Government programs like the FSA are less restrictive about what credit scores they permit from applicants. They will look at your credit score but consider your background in the farming industry too. If you have significant farming experience, you’re more likely to be approved even with a less-than-desirable score.

3. Have someone co-sign your loan.

Another tip for getting approved for a farm loan with bad credit is enlisting a co-signer’s help. If the co-signer has better credit than you, your loan will likely be accepted by the lending agency.

4. Pursue income-based loans.

Some lenders will approve you based on your farm’s income instead of your credit score. These lenders will let any farm with income above a specific minimum, which varies by loan provider, borrow money. These loans are often quickly approved, though they may be on the smaller side.

5. Show your bad credit doesn’t define you.

Farming experience can prove more important than your credit score to some lenders. Other factors matter too, such as the business debt you carry, your debt-to-income ratio, your business plan, and possession of high-value assets — especially those more valuable than your loan. Include these items with your loan application, and you just might get the funding you need.

Kimberlee Leonard contributed to this article.