For Texas farmers and ranchers, securing the right financing can mean the difference between a thriving agricultural operation and missed opportunities.
The board-certified farm and ranch real estate attorneys at Texas Horizons Law Group regularly guide clients through the complexities of agricultural lending. Here's what you need to know about farm loans and how they can help you achieve your agriculture business goals.
What Is a Farm Loan?
Farm loans are special loans designed to benefit farmers. They’re different from regular business loans because farming income isn't always steady, cash flow changes with the seasons, and farming comes with its own set of hurdles.
These loans can be used for everyday expenses, new equipment, buying land, or improving buildings, offering vital support for both experienced and beginning farmers.
Types of Agricultural Farm Loans in Texas
If you’re planning on buying a farm, you’ll be interested to know that there are various types of loans tailored to specific farming needs, including:
- Operating loans: Short-term financing for day-to-day farm expenses, such as seeds, fertilizer, feed, and labor; typically repaid within one year.
- Equipment loans: Financing for farm equipment purchases like tractors, harvesters, and irrigation systems; feature fixed payments and longer terms.
- Real estate land loans: Long-term loans for buying or expanding farmland and making improvements; often come with competitive rates and extended repayment periods.
- Agribusiness loans: Financing for large agricultural operations, covering processing facilities, bulk purchases, and expansion projects.
- Improvement loans: Funding for upgrades to farm structures, storage, or sustainable energy systems to increase efficiency.
The type of loan you seek will depend on your individual circumstances, including the size of your farm, the nature of your operations, and your specific land and material needs.
FSA Farm Loan Programs
The U.S. Department of Agriculture's Farm Service Agency (FSA) offers several loan programs intended to support farmers and ranchers. Here’s a brief overview of some of these instrumental loans:
Farm/Ranch Purchase and Expansion Loans
- Farm ownership loans: Offer up to $600,000 for beginning farmers and ranchers and/or minority and women applicants to purchase or expand farms and ranches.
- Microloans: A type of operating or ownership loan designed for small and beginning farmers or specialized operations, offering streamlined requirements and less paperwork.
- Emergency loans: Help farmers recover from natural disasters and related losses.
- Guaranteed farm ownership loans: Enable access to commercial lender financing with USDA backing.
- Loans for single-family homes: Support the purchase or construction of homes on farm property.
Financing for Farm Supplies
- Farm operating loans: Provide up to $400,000 for eligible borrowers to purchase livestock, seed, and equipment and cover operating costs and family living expenses.
- Microloans: Offer smaller amounts with simplified requirements for specialty operations.
- Youth loans: A type of operating loan for young farmers aged 10–20 participating in educational agricultural projects.
- Guaranteed farm operating loans: Help family farmers and ranchers secure loans from approved lenders for farm operating costs.
Storage Loans
The FSA advertises two main types of storage loan programs to help agricultural producers:
Farm Storage Facility Loan
- Provides up to $500,000 for building or upgrading storage facilities.
- An additional $100,000 available specifically for storage and handling trucks.
- Helps farmers safely store harvested crops and maintain product quality.
Sugar Storage Facility Loan
- Financing calculated at 85% of the needed storage facility's cost.
- Designed specifically for sugar producers and processors.
- Funds construction or upgrade of sugar storage and handling facilities.
Commodity Loans
The following programs offer support to agricultural producers through commodity loans:
- Marketing assistance loans (MALs): Provide interim financing at harvest time.
- Loan deficiency payments (LDPs): Offer alternative support when market prices are low.
Texas Agricultural Loan Guarantee Program
The Agricultural Loan Guarantee Program (ALG) helps Texas farmers and ranchers obtain financing through a tiered guarantee structure. The program offers guarantees of up to 90% for loans under $250,000, 80% for loans up to $500,000, and 70% for loans up to $750,000, with a maximum term of 10 years or the asset's useful life, whichever is less.
To qualify, borrowers must have a credit score of at least 650, contribute 15% equity, maintain a debt-to-equity ratio of 2:1 or less, and demonstrate a debt service coverage of 1.25 or better. The program is available through state-chartered banks and farm credit lenders, requiring a $100 application fee and a 1% origination fee of the guaranteed amount.
Funds can be used for various agricultural purposes, including working capital, facility leases, equipment purchases, and real estate acquisition. The program also offers an interest rebate of up to $500 annually, not exceeding the 1% origination fee over the guarantee term.
Lenders must submit quarterly reports on loan performance, and applications are accepted year-round, subject to funding availability.
What Are the Agriculture Loan Requirements in Texas?
How hard is it to get a farm loan in the Lone Star State? To qualify for a loan, you must meet a few general criteria, including:
- Strong credit history and financial statements
- Farm management experience or education
- A viable business plan
- Sufficient collateral
- Demonstrated ability to repay
It’s important to note that the specific requirements may vary between loan types.
How Many Acres Do You Have to Have to Get a Farm Loan?
To qualify for a commercial agriculture and farm loan with a minimum loan amount of $500,000, you must have at least 10 acres of property with a minimum credit score of 680.
Hobby farm loans, which have a maximum loan amount of $2 million, are available for properties between five and 160 acres (with select offerings over 160 acres) that are agricultural in nature and include a pre-existing home serving as the borrower's primary or secondary residence. A minimum credit score of 680 is also required.
What Is the Typical Down Payment for a Farm Loan in Texas?
The down payment required for a farm loan in Texas can vary depending on the type of loan and the lender. However, here are some general guidelines:
FSA Loans
For their Down Payment Farm Ownership Loan, the FSA asks for a minimum cash down payment of 5% of the purchase price of the farm. The agency will then loan up to 45% of the purchase price or appraised value, whichever is less. The remaining balance may be financed by a commercial, cooperative, or private lender, including the seller.
Other Lenders
Commercial banks, credit unions, and other lenders, such as Capital Farm Credit and Texas Farm Credit, also offer farm loans.
The down payment requirements for these loans can differ considerably depending on the lender, the type of loan, the borrower's creditworthiness, and other factors. Typically, lenders like to see at least 20% down, but some may require more or less.
It’s a good idea to shop around and compare loan terms from different lenders to find the best option for your needs. You can also contact your local FSA office to learn more about their loan programs and eligibility requirements.
How Long Are Most Farm Loans?
Farm loan terms can be extremely variable. For farm ownership loans, especially those offered through the FSA, you might be looking at repayment periods of up to 40 years. Operating loans, meanwhile, which cover things like equipment or yearly expenses, are typically shorter, often up to seven years.
Keep in mind that these are just general guidelines. The actual term of your loan will depend on a number of factors, including the type of loan, the lender, and your financial situation.
Pros and Cons of Agricultural Loans
Every agricultural loan type comes with distinct advantages and considerations. Here’s a breakdown of some of the benefits and drawbacks of several main varieties:
Tips for Getting an Agricultural Loan
Even with a less-than-perfect credit history, agricultural financing remains possible. The following suggestions can help you score the loan you need:
Explore Alternative Lending Options
Some lenders work with borrowers who don't have the best credit, although their interest rates might be higher initially.
Leverage Your Agricultural Expertise
Your farming know-how can be highly valuable. Government programs, like those the FSA offers, often consider the applicant’s knowledge and experience alongside their credit score.
Get a Cosigner
Having a creditworthy cosigner can strengthen your loan application, potentially leading to more favorable terms and a higher likelihood of approval.
Consider Revenue-Based Financing
Certain lenders focus primarily on a farm's revenue generation rather than credit history. Farms that demonstrate consistent income above established thresholds may qualify for financing regardless of past credit challenges.
Showcase a Comprehensive Financial Profile
A solid business plan, manageable debt, and valuable assets can make all the difference. Emphasize the overall financial health and potential of your farm to improve your chances of being approved.
