fbpx

Understanding Farm Loans and Farm Financing Terms

Cash Rent Financing,Mortgage,Operating,Refinance

Introduction

There are several types of farm loans, including 1) operating loans to fund day-to-day running of the farm, 2) cash rental loans to fund annual farm rentals, 3) farm mortgages to finance the purchase of farmland, 4) farm refinancings to refinance a farm mortgage into a better rate / terms, and 5) term loans to fund equipment and machinery. We’ll dive into each of these farm loan types as well as some farm financing terminology below.

The Farming Cycle

Before we get into each of the farm loans, it’s important to explain why they all exist. Some (like farm mortgages) are self-explanatory: farms are expensive and most folks need a farm loan to make the purchase. An operating farm loan is necessary for most farmers in the Midwest because of the agricultural cycle. For row crops, planting occurs in the springtime (usually from March to May). Harvest occurs from September through Thanksgiving. After harvest, farmers sell their grain, earning their revenue anywhere from September through December. So there’s a big mismatch between when most expenses are made and when revenue is earned. Farmers have to buy seed, new equipment, finance labor, and any fertilizers at the start of the season but won’t make revenue for at least six months. Operating farm loans help provide funding during the first half of the year. Farmers pay off the loan with the revenue earned post-harvest.

The same concept is true for cash rent loans. Cash rent is usually due at the start of the season (March 1st) and can be as much as 40% of a farmer’s full-year expenses.

Operating Farm Loans

Operating loans are typically structured as credit facilities. This means that farmers can draw (or borrow) as much as they need while the loan is outstanding. A typical operating farm loan is signed a month or two ahead of planting season (March 1) and is due back to the bank anywhere from 12 – 15 months later. Usually, a borrower only pays interest on the funds they actually borrow. For example, a farmer could sign a $1m operating loan, but only end up using $800k. The farmer would only pay interest on the $800k borrowed. It’s advisable to create a business plan for the year and apply for a farm loan that would cover unforeseen expenses. That way, it’s easy to access funds as and when needed. It is possible to make an operating loan larger during the season but could just take time to be approved.

Operating farm loans are typically secured by collateral, or property that the borrower owns and the bank could claim if the loan is in default. Collateral can be tractors or even the crops that the farmer grows.

Cash Rent Loans

Cash rent loans are unsecured loans to finance cash rent. Unsecured loans are not secured by collateral. Our cash rent loan has a springing lien, meaning that if the loan is in default, collateral will then be required. This is beneficial for borrowers who do not have to assign collateral at the start of the loan.

Farm Mortgages

Farm mortgages are loans used to purchase farmland. They can be both fixed and variable. Fixed rate loans maintain the same interest rate throughout the life of the loan. Variable rate loans can have a fixed rate for the first months or years of the loan – they will then change rate in line with a pre-determined benchmark. Farm mortgages can be up to 30 years in duration. The longer the loan, the more interest a borrower will pay to the lender – however, the longer term could provide more affordability. A $1m loan spread over 30 years results in smaller annual payments than a $1m loan spread over 10 years.

Farm Refinancings

Farm refinancings are done when better terms are available for a farm mortgage. If a borrower has a 30-year farm mortgage outstanding at a 5.0% rate and rates drop down to 4.0%, a borrower would want to refinance, or change their loan, into the lower rate option to save money. If a borrower also makes more income or has paid off other personal debt, lower rates might be available to them that were unavailable at the time of the original farm loan. Before deciding to do a refinance, a borrower should compare the total savings to any fees to be taken out at the time of the loan.

Farm Term Loans

Term loans are mid-length loans that can be used for more intermediate expenses. Unlike operating loans that cover expenses to be paid off in one year, term loans are usually 3 – 7 years in length and are used to pay for equipment, machinery, and livestock. Term loans have both fixed and variable rates and also use a Loan to Value (LTV) concept.

Farm Loan Fees

Farm loans are subject to similar fees as personal and residential loans. An origination fee is a fee for the bank to originate, or create, the loan. It covers general paperwork and processing. A servicing fee is an ongoing fee to cover the maintenance of the loan. Banks may or may not charge these fees, but it is important to ask at the outset.

For farm mortgages, there will be additional fees for appraisals and title services. An appraisal is an authorized check of value by a bank or a verified third party. The bank will need the appraisal done before originating the farm mortgage. This is to verify that the land will produce income and the loan value is defensible. A title check is performed to ensure that the farm is being sold without debt or obligations attached to it.

How are Farm Loan Fees Calculated?

Farm fees are typically calculated by basis points (bps). A basis point is 1/100th of a percent. In other words, 100 basis points = one percent. A standard origination or servicing fee is 50bps (0.5%) of the loan value.

Appraisals and title checks are usually done for a fixed fee. Appraisals can typically be anywhere from $300 – $1,500.

Conclusion

AFF can help with any of your farm financing needs. Reach out to us at (872) 246-9087 for more on our interest rates and no-fee loans. 


Apply Now

Tags :
Share This :

Reader interactions

25 Replies to “Understanding Farm Loans and Farm Financing Terms”

  1. Farm term loan I have a question about the intrest

    Reply

  2. can flonase make you sleepy alternatives to allergy medication allergy medication without side effects

    Reply

  3. Thank you for your sharing. I am worried that I lack creative ideas. It is your article that makes me full of hope. Thank you. But, I have a question, can you help me?

    Reply

  4. Your article helped me a lot, is there any more related content? Thanks!

    Reply

  5. Your article helped me a lot, is there any more related content? Thanks!

    Reply

  6. Wow, awesome blog format! How lengthy have you been blogging for?
    you make running a blog look easy. The total glance of your site is
    wonderful, let alone the content material!
    You can see similar here sklep online

    Reply

  7. Wow, incredible weblog layout! How long have you been running a blog for?
    you made blogging glance easy. The full glance
    of your web site is magnificent, as smartly as the content!
    You can see similar here najlepszy sklep

    Reply

  8. I feel that is among the most vital info for me.

    And i am glad studying your article. But should remark on some common things, The web site taste is perfect,
    the articles is actually great : D. Good process,
    cheers I saw similar here: E-commerce

    Reply

  9. Wow, awesome blog layout! How lengthy have you been blogging for?
    you make blogging glance easy. The entire look of your website is fantastic, as well as the content material!
    You can see similar here sklep internetowy

    Reply

  10. Your point of view caught my eye and was very interesting. Thanks. I have a question for you.

    Reply

  11. Hey! Do you know if they make any plugins to help
    with Search Engine Optimization? I’m trying to get my blog to rank
    for some targeted keywords but I’m not seeing very good success.

    If you know of any please share. Many thanks! You can read similar article
    here: Sklep online

    Reply

  12. It’s very interesting! If you need help, look here: ARA Agency

    Reply

  13. What’s up, this weekend is good in support of me, as this point
    in time i am reading this great educational piece of writing here at my residence.

    Also visit my homepage; vpn special coupon code 2024

    Reply

  14. Hello there! I know this is kinda off topic nevertheless I’d figured I’d ask.
    Would you be interested in exchanging links or maybe guest authoring a blog post or vice-versa?
    My site goes over a lot of the same subjects as yours and I think we could greatly benefit from each other.
    If you’re interested feel free to shoot me an e-mail. I look
    forward to hearing from you! Fantastic blog by the way!

    my webpage – vpn coupon 2024

    Reply

  15. Hello! Do you know if they make any plugins
    to assist with Search Engine Optimization? I’m trying
    to get my blog to rank for some targeted keywords but
    I’m not seeing very good gains. If you know
    of any please share. Cheers! You can read similar blog here:
    Ecommerce

    Reply

  16. I wanted to thank you for this good read!!
    I definitely loved every bit of it. I have got you saved as a favorite to look
    at new things you post…

    Feel free to visit my web blog – vpn code 2024

    Reply

  17. I don’t think the title of your article matches the content lol. Just kidding, mainly because I had some doubts after reading the article.

    Reply

  18. It’s remarkable in favor of me to have a web site, which is good in support of my experience.
    thanks admin

    my blog :: vpn coupon code 2024

    Reply

  19. Good day! Do you know if they make any plugins to assist
    with SEO? I’m trying to get my website to rank for some targeted keywords but I’m not
    seeing very good success. If you know of any please
    share. Thank you! You can read similar article here:
    Scrapebox List

    Reply

  20. Hi! Do you know if they make any plugins to assist with SEO?

    I’m trying to get my website to rank for some targeted keywords
    but I’m not seeing very good gains. If you know of any please share.
    Appreciate it! I saw similar article here: List of Backlinks

    Reply

  21. At this time I am going away to do my breakfast, after having my breakfast coming over again to read more news.

    Here is my web site: vpn coupon code 2024

    Reply

  22. I really like what you guys are usually up too.
    Such clever work and exposure! Keep up the excellent works guys I’ve
    included you guys to blogroll.

    Here is my web-site :: vpn special code

    Reply

  23. Thanks for sharing your thoughts. I really appreciate your efforts
    and I will be waiting for your further write ups thank you once again.

    Feel free to visit my web blog; vpn special

    Reply

  24. Your article helped me a lot, is there any more related content? Thanks!

    Reply

  25. Your article helped me a lot, is there any more related content? Thanks!

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

Recent Posts

Subscribe To Our Newsletter

Stay up to date with the latest blog posts, offerings, and AFF news.