By: Anna Brunner
Purpose: To highlight the loans available from the USDA aimed at helping beginning farmers.
For beginning farmers the process of securing funding either to buy land or equipment has been cited as one of the biggest barriers to success. This document covers the loan opportunities that the USDA targets at beginning farmers in an attempt to surmount barriers to start-up success. Not only are land and equipment expensive for a beginning farmer, but often these farmers lack the capital to secure loans. There are more and less friendly banks for beginning farmers to try to get loans from (Farm Credit Service banks being some of the most friendly), but if farmers cannot get a loan through more traditional channels the United States Department of Agriculture, or USDA, has several loans offered through its Farm Service Agency, or FSA, that are specifically targeting beginning farmers.
USDA Definition of Beginning Farmer and Qualifications
Hoophouse build at Tilian
Because the FSA is trying to help socially disadvantaged and beginning farmers increase their access to both land and equipment money is set aside specifically for individuals falling into either or both of these groups. All beginning farmers trying to secure a loan from the USDA should be aware of how the Department defines a beginning farmer: “A beginning farmer or rancher is an individual or entity who (1) has not operated a farm or ranch for more than 10 years; (2) meets the loan eligibility requirements of the program to which he/she is applying; (3) substantially participates in the operation; and, (4) for FO [Farm Ownership] loan purposes, does not own a farm greater than 30 percent of the median size farm in the county. (Note: all applicants for direct FO loans must have participated in business operation of a farm for at least 3 years.) If the applicant is an entity, all members must be related by blood or marriage, and all stockholders in a corporation must be eligible beginning farmers.” Farmers that have graduated from the Tilian Farm Incubator will have had a minimum of two years of experience, and if they bring any years of farm business operations with them prior to working with Tilian, they would be eligible for a farm ownership loan. Besides loans furthering farm ownership, the FSA also offers farm operation loans, or OLs. Farmers must have “sufficient education; training, or at least 1-year’s experience in managing or operating a farm or ranch within the last 5 years” in order to be eligible for an OL. Socially Disadvantaged Farmers are defined as “a group whose members have been subject to racial, ethnic or gender prejudice because of their identity as members of a group without regard to their individual qualities. These groups consist of American Indians or Alaskan Natives, Asians, Blacks or African Americans, Native Hawaiians or other Pacific Islanders, Hispanics and women.” [Source 1] [Source 2] [Source3]
Regardless of what the loan is for the USDA FSA administers loans through the local FSA offices. The local FSA office in Michigan is located in Lansing. For more information about the local FSA office, in Michigan or any other state, please visit the USDA’s website. The first step in the loan process would be to contact your local FSA official once you have an idea of what you need funding for. The FSA official can then tell you about various loan programs offered and help you determine which one might be best for your situation. Having a better idea about the loans available will help.
Guaranteed and Direct Loans
Although the FSA’s loans are focused on beginning farmers who have trouble getting a loan through traditional means, most of the loans offered by the FSA are through commercial lenders whose loans are backed by FSA funds up to 90%. These loans are called guaranteed loans. In most cases you will be working with local FSA officials and a commercial lender to secure funding. If you do not meet the qualifications for a guaranteed loan, the FSA also offers direct loans. Direct loans offer both direct funding from the government, but also direct help from the FSA in identifying shortcomings in your farming operations, methods for improvement, and also assessing the quality of land and facilities for your farm’s goals. Both guaranteed and direct loans are only given to applicants with the ability to repay the loan in full. More information about all the loans mentioned in this document can be found here.
Types of Loans
Farm Ownership Loans
Farm Ownership loans can be used towards the purchase of an existing farm, construction of new farm buildings, improvement of farm structures, payment of closing costs, and promotion of soil and water conservation. Direct loans have a maximum limit of $300,000, while guaranteed loans have a limit of $1,119,000. The maximum repayment term for both is 40 years.
Farm Operating Loans
Farm Operating loans can be used towards normal operating expenses, machinery and equipment, real estate repairs and refinancing debt. Direct loans have a maximum limit of $300,000, while guaranteed loans have a limit of $1,119,000. The repayment term for longer loans will not exceed seven years, although annual operating loans are generally either repaid within 12 months or when commodities are sold.
Downpayment Program and Emergency Loans
Volunteers helping raise a hoophouse
Two other loans offered by the USDA to Socially Disadvantaged and Beginning Farmers through the FSA that you should be aware of are the Downpayment Program and Emergency Loans. The Downpayment Program helps with the purchase of a farm, and tries to connect retiring farmers with younger farmers looking for land. To qualify the applicant must make a cash downpayment of at least 5 percent of the purchase price and the maximum loan amount cannot exceed $225,000. The term of the loan is 20 years with an interest rate of at least 1.5 percent. The remaining balance may be obtained through a guaranteed FSA loan, or through a commercial lender outside of the FSA’s program.
Emergency Loans are only available as direct loans from the FSA, with a maximum amount of $500,000. In areas declared by the President as disaster areas, or by the Secretary of Agriculture as disaster or quarantine areas, these loans assist farmers suffering from physical or production losses. The loans can be used to replace or restore essential property, recoup production costs for the disaster year, cover essential family living expenses, and reorganizing and refinancing certain debts. Emergency loans are an important service to know that the USDA offers in case of disaster, but unlike other loans discussed here are not specifically for starting new farming operations.
When applying for loans designated for socially disadvantaged and/or beginning farmers, meeting the definition of either category is the first requirement. However, there are other loan eligibility requirements as well. For most loans it is important that the farms are small, family-sized operations, as well as for the applicants to have a good credit history. Additionally, applicants must be unable to obtain reasonable credit elsewhere, and not have held another FSA loan within a specific time period. Different restrictions apply to groups or organizations applying for FSA loans. [Source 4]
The Old Red Barn at Tilian
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Sources:
1) USDA website. Accessed December 8, 2011.
2) USDA FSA (February 2011) Fact Sheet: Farm Loans. Accessed December 8, 2011
3) USDA FSA (February 2011) Fact Sheet: Socially Disadvantaged Farmers and Ranchers Loan.
4) Text and information based off of or taken directly from: USDA FSA (February 2011) Fact Sheet: Farm Loans. Accessed December 8, 2011
