How to Finance Growth With Debt

October 23, 2015 03:01 PM
How to Finance Growth With Debt

By Peter Martin

The upside to low commodity prices, the aging farmer and inadequate financing for agriculture is opportunities for strong, prudent and progressive producers to grow and strengthen their enterprise.

Sure, you can add acres—there will be plenty up for grabs in the next few years. I encourage you to think deeper as you contemplate your operation’s future: Could you partner with another producer to create a unique competitive advantage? What about adding value through a sustainability program? Could you open doors to new markets or invest in a new agribusiness technology company?

Whichever opportunity you choose to pursue, be ready to jump when the time is right. I’ll discuss investor capital in a future column; but, for now, consider these debt sources to finance your growth plan.

Family and friends: Generally speaking, family and friends are the most generous, flexible lenders you’ll ever come across. They’re investing in you and your future. If a problem arises, they’re the ones most willing to work with you. But this financing source comes with a big potential drawback—it’s impossible to completely separate business from the personal side of the equation. Avoid this type of financing unless it’s the only source available.

Seller-carried transaction: Older farmers nearing retirement can be a great capital source in a world that rarely provides adequate financing for young farmers. Whether it’s a father willing to finance a son or daughter or an older farmer with no children who wants to preserve the farm, seller-carried financing can offer great opportunity for a farmer or rancher who wants to expand. It also offers additional tax-planning flexibility.

Commercial banks and Farm Credit: The most common source of financing, banks have plenty of money and are interested in agribusiness. They can be the cheapest source of money but also the most conservative. If you seek financing through a commercial bank or Farm Credit, expect to make a significant down payment, provide a solid repayment plan and show a strong collateral position. For a farmer in good financial standing, however, the sky is the limit on what you can borrow from banks. They understand agriculture is cyclical and are willing to deploy the capital to help a strong operator grow.

Farmer Mac: Chartered by Congress in 1987 and traded on the New York Stock Exchange, Farmer Mac provides an additional lending source for agriculture, though it’s often misunderstood and underused. Farmer Mac offers several unique long-term financing options for farmers and ranchers with a strong balance sheet. If you have equity in your ground, Farmer Mac is an option worth exploring.

USDA’s rural loan programs: As a commonly overlooked source for business capital, USDA offers a variety of financing solutions, including direct and guaranteed loans to family-size farmers and ranchers. Another USDA program provides loan guarantees to shore up requests for a variety of industries, including agriculture in smaller communities.

Alternative financing sources: Agriculture significantly lags behind other industries in the availability of capital from alternative financing sources. There are a handful of non-bank lenders stepping up to the plate to provide capital for expansion. For example, Farmland Partners Inc. recently announced a new loan program to help fill this void. 

Now is the time to line up debt sources for growth. Don’t be caught without capital when the right deal comes your way.  

This column is not a substitute for financial advice. 

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Spell Check

Chappell, NE
10/23/2015 07:45 PM

  Never realized these shitty grain prices are such a great deal!! Let the good times roll!

Garden,City, KS
10/23/2015 08:03 PM

  The low grain prices are the farmers own fault. Over production = low prices.

Macy, IN
10/24/2015 07:14 AM

  Maybe some of these are options for a few people, but in the end, if you seek low interest loans from any government program, you must prove you cannot get money from a mainstream institution at higher rates. Low interest loans are only available for start up farms or distressed farms.


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