Maybe you’ve heard lenders talk about the lien position they need to take out on your operating loan – first, second, best available. We’ll dive into what these terms mean and how they relate to your farm loan structure.
Farm loans: What is lien priority?
Lien priority is the order in which lienholders get paid out after a default. A lienholder is someone who has a lien, or a right to a payout, following a default.
Secured loans are farm loans that are backed by collateral. For example, a typical mortgage is backed by the property itself. If you default on making monthly payments on your farm, a lienholder would be able to claim the land as collateral.
Continuing with this example, a first lien holder would be the first lender to recoup payment from the land. Let’s look at a practical scenario.
Let’s say you have a $1,000,000 farm, which has a $500,000 mortgage attached to it, which is now in default. If the mortgage-lender is a first-position lienholder (they likely will be), they would be entitled to receive their money back via the farm. The lender would reclaim control of the farm and auction it off, claiming their $500,000 before the rest of the proceeds were divided amongst other lienholders. After the first-position lienholder is paid, the second, third, etc. would get paid. Another lien position, “the best available”, is the lowest lien position available at the time of loan origination. If there are already two lenders, the “best available” lender would take the third position.
Lien priority and operating loans
Depending on the size of your operating loan, your lender may request a lien position against your crop, your farm, or any other available assets. What does this mean for business planning? As a farmer, you need to prioritize which lenders will have the best positions on your assets based on your different relationships.
AFF’s farm loan offerings
We offer operating loans that come with a springing lien. A springing lien takes the best available lien position only after a default. This means that at loan signing, the farm loan is unsecured and would stay that way so long as normal payments are made. We want to free up your collateral so you can use it with other lenders towards other farm improvements. We’re making sure farmers get access to the best capital quickly.