Agricultural Finance: What Is an Agricultural Loan?

If you work in agriculture, you know that it’s been a tough few years for business. Everything from supply chain issues to the pandemic has complicated the important work agriculture workers do, and it’s created a tougher financial reality for many.

Understanding agricultural finance has always been important for anyone looking to get into this industry, but it’s more important now than ever. Bank loans, specifically agricultural loans, are the backbone of this industry.

They’ve been used to do everything from support individual farm operations to fund research for tech advancements. What do you need to understand about agricultural loans and their impact on the overall farming industry? Read on and we’ll walk you through the basics.

What Are Agricultural Loans?

People in nearly every industry turn to banks and other money lenders for loans or credit to make their work possible. Some industries even have systems established through financial institutions to provide streamlined access to the types of loans they require.

Often, agricultural loans are referred to as agricultural credit. This is a specific type of financing that is adapted to the financial needs of farmers and allows those that work in this industry to do all needed to keep their farms running.

The overall backbone of this setup? The Federal Farm Credit System is frequently abbreviated as the FFCS. This system has been around since 1916 and it’s made up of a series of institutions that total nearly $200 billion.

The goal of this system is to help keep loans affordable for farmers so that they can continue to work, provide food for the country, and turn a profit. Low-interest loans and subsidies are provided to farmers to help them secure the money they need to run a farm – which can often be an expensive prospect.

In other countries, farms receive financial subsidies from the state. This is the case in much of the EU and Russia. In the United States, this kind of agricultural credit needs to be in place to stay competitive with the farmers of other countries around the world.

What Is an Agricultural Loan Used For?

If you work in the farming industry, an agricultural loan can be essential to keeping things running smoothly. Running a farm properly can require juggling what may feel like an endless series of balls, and keeping out of debt can often be tricky.

Farmers can use agricultural loans from the FFCS system for a wide variety of tasks, though some are more common than others.

Often, farmers who are just starting out will use this kind of loan to help in their purchase of farmland. Starting up is a difficult part of agribusiness, and getting the funds to invest in the initial land can go a long way. It’s the basis of a great farm, of course.

The main thing that these loans are often used for? You guessed it: covering the expenses of operating. Keeping everything going on a farm is hard work, from the staff, to the tech, to the materials. Operating costs can sometimes be prohibitively high.

In order to keep farmers in the green, they rely on low-interest loans from the government. This can help to keep farms running without disruption.

Last but not least, these loans are often also used for marketing efforts. Farming is a lot about the work itself, but sometimes some extra work is needed to get the word out about their products. Marketing of any sort can be expensive, but agricultural loans can be used to help turn this goal into a reality.

Applying for an Agricultural Loan

If you were in need of an agriculture loan, where could you turn? This is a question farmers who are new to borrowing have to face. Luckily, there are many different options for lenders when it comes to an agricultural loan.

The easiest place to look? A major bank. Most farmers will turn to their local bank first when it comes time to take out a loan. Often, if you are already a customer of a particular bank, it can be easier and more streamlined to get a loan from that location.

They’ll already have your info on file, know about finances, and should have a solid read on your credit score. They should be able to provide a relatively low interest loan with little trouble.

Of course, if there’s an issue with acquiring a loan through your bank, there are other options that can you look into.

Direct Government Loans

While a traditional loan will be your first move, it isn’t the end of the road if you don’t get approved by your bank. You still can turn to the government to help you get the cash you need to keep operating.

The government has a particular agency, known as the Farm Service Agency, that is in place to help farmers stay afloat. This agency will offer low-interest loans to farmers in need and help them to cover the costs they are facing.

These direct loans have certain specifications and requirements, and must be used towards a specific goal. For example, if a farm needs a particular piece of equipment replaced, a government loan could be used for that purchase.

However, just generally taking a loan for various needs around a farm might not be permitted.

There are different government agricultural loans available, and each state will have different programs in place. You’ll want to do your research ahead of time to determine which loan program might be best for your farm. Crop input loans, feedlot financing, livestock financing, and much more might all be available.

Understanding Agricultural Finance

If you’re looking to start a farm in the near future, you’ll want to start by learning the basics of agricultural finance. The above information can walk you through how loans and credit play a big role in how the farming industry works.

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