Farm Loan Basics

1. Farm Loan Basics Am I Ready to Borrow Money?

2. An Outsider’s Perspective of the Loan Approval Process

3. An Insider’s Perspective of the Loan Approval Process

4. Flavors of Capital Funding Debt CapitalEquity Capital Borrowed money, Ownership stake, repaid in the future, yields $ (dividend) to Owed to creditor shareholder, typically held as an investment

5. Where Capital Comes From Debt CapitalEquity Capital Loan Your savings Credit card Mom and Dad Pawn shop Sale of stock Neighbor helping out Angel Investor Specialty Capital Grants CSA shares

6. What is Constructive Credit? • Appropriately structured loan… • To achieve realizable goals… • That are within the capacity of the borrower to manage and achieve… • In order to accomplish repayment and further profitability for the borrower

7. Constructive Credit is not: • A loan for more than you need… • For a farm enterprise purpose neither you nor the lender understand… • Without adequate assessment of risk… • Without likelihood of repayment.

8. Obtaining Constructive Credit Business Plan: Your design for your business • Doesn’t have to include borrowing • But must include source(s) of money For any partnership, business goals must be aligned • Long term viability • High expectations of success • Valuable partner • Farm Credit and our Member-Borrowers have an investment in each other

9. Relationship Lending works both ways For you to be a valuable partner: • Business plan • Accurate financials • Honest and ethical relationship For a lender to be a valuable partner: • Knowledge of your type of agriculture • Interest in long-term relationship • Capacity to meet your needs • Competitive products/quality services • Stable staff/access to decision maker • Clear communications

10. Getting Ready You decide how prepared you are to borrow • Understand Your Financial Position • How does it compare to your industry? • How does it fit with your plans and goals? • What needs to happen to get from “A” to “B” • Recognize Your Own Strengths and Weaknesses • Production • Financial • Marketing • Managerial

11. Preparing for Success • Draft a Realistic, Written Business Plan • Goals statement • Resume and References • What needs to happen to get from “A” to “B” • Detailed Financial Statement • Income & Expense with History & Projections • Cash Flow • Marketing Plan • Capital Spending Budget • Source & Use of Capital • Back-up Plan

12. The Five Cs of Credit • Character • Experience, reputation, history with other creditors (CBR) • Capacity • Earnings, historical and projected • Ability to repay the proposed debt and provide excess funds for family living and CAPEX under reasonable circumstances • Borrower’s sensitivity to rates, input costs increases, decline in demand • Capital • Current financial position • Funds available for down payment, working capital, etc • Post-close position, room for adversity • Collateral • Security position of Lender (and their requirements) • Personal Property or Chattels • Real Estate • Conditions • Additional Terms and Conditions • Reporting requirements, results related requirements • Guarantee requirements

14. Sources of Debt Capital to US Agriculture • Farm Credit • USDA/FSA and SBA (also provides guarantees and credit enhancements) • Local Commercial Lenders • Mission-based Lenders (FarmStart, Carrot Project) • Family • Other individuals • Merchants & Suppliers

15. I Need Help to Figure this Stuff Out! • Resources: • Cooperative Extension, USDA, Farm Credit • Networking: • Farm Bureau, Farm’s Union and local farmers • MA Association of Roadside Stands, MA Association of Dairy Farms, Worcester County Beekeepers • New England Small Farms Institute/ New England Land Link • Each state has unique programs available

16. USDA Farm Service Agency

17. Mission Statement To advance family farmers and ranchers build and sustain family farms and ranches and develop the financial and business expertise to qualify for commercial credit. “Serving Family Farms, Cultivating Opportunities”

18. Who is FSA The Farm Service Agency (FSA), is an agency within the United States Department of Agriculture (USDA). FSA’s Farm Loan Programs (FLP) can provide credit to agricultural producers who are unable to obtain private, commercial credit. FSA places special emphasis on providing loans to beginning, minority and women farmers and ranchers.

19. USDA-Farm Service Agency Introduction to FSA Farm Loans If you are a farmer or rancher who is unable to obtain credit from another lender to start, purchase, sustain, or expand your family farm you may be able to get a loan through FSA’s Farm Loan Programs. FSA has different types of loans depending on your current situation and what you need the loan for. FSA loan officers are available to answer your questions and to help with the application process.

20. What Type of Loans are Available Guaranteed Loan Program Farm ownership Operating Conservation loans Direct Loan Program Farm ownership Operating Emergency Conservation loans

21. Farm Loan Programs Information Chart

22. Farm Loan Programs Information Chart Continued * To determine the maximum loan limit for the current year, please check with your local FSA loan officer at http://offices.sc.egov.usda.gov/locator/app or our website at http://www.fsa.usda.gov/Internet/FSA_File/guaranteed_farm_loans.pdf ** Direct loan interest rates are adjusted monthly and are posted online at http://www.fsa.usda.gov/FSA/webapp?area=home&subject=gfmlp&topic=fir and at your local FSA office.

23. Loan-Specific Eligibility Requirements Direct Operating Loan • Meet all general eligibility requirements • Have farm experience equal to minimum 1 year full production and marketing cycle • 7 year term limit for direct OL assistance, with 1 time 2-year waiver • Beginning Farmers may receive no more than 10 years direct OL assistance

24. Farm Managerial Experience • Farming Experience • Owner, manager or operator of farm business for minimum 1 production & marketing cycle • Monitor production and marketing • Hire, assign and supervise workers • Oversee maintenance of property and equipment • Determine when to cull livestock • Select seed varieties; when to plant/seed/harvest; when to fertilize & method • Determine crop transportation or storage requirements • Raised on farm, management decision-making • Employed as farm manager or farm management consultant for minimum 1 production & marketing cycle

25. Youth Loans

26. Rural Youth Loans • Finance modest, income-producing, agriculture-related, educational project that falls under authorized loan purposes • Eligibility: • 10 to 20 years old • Lives in community 50,000 persons or less • Project related to 4-H, FFA, Grange Youth • Parental permission and supervision • Project Advisor • Maximum Loan Amount is $5,000 • Rates and Terms • 1 – 7 years, depending on loan amount and security • Direct OL interest rate

27. Eligibility Requirements • $5,000.00 • 10 to 20 years old • Reside in rural area • Have a project advisor • No history of debt forgiveness • Adequate Security • Parent Consent • Annual installments

29. Farm Storage Facility Loan • FSFL Program Purpose • Provides low interest financing for producers to build or upgrade farm storage and handling facilities to store the commodities they produce. • Eligible Commodities • Corn, grain sorghum, rice, soybeans, oats, peanuts, wheat, barley or minor oilseeds harvested as whole grain • Corn, grain sorghum, wheat, oats or barley harvested as other-than-whole grain • Pulse crops - lentils, chickpeas and dry peas • Hay • Renewable biomass • Fruits, Nuts and Vegetables - cold storage facilities

30. Maximum Loan Amount • Maximum loan amount of $500,000 • Loan Process • Borrower must meet eligibility requirements • COC or STC approval required before construction can begin • $100 application fee • 15% cash down payment required • Rates and Terms • 7 years; 10 years; or 12 years depending on amount of loan • Interest rate fixed for loan term at rate in effect the month the loan is initially approved • Interest rate is equivalent to the rate of interest charged on Treasury Securities of comparable term and maturity

32. FSA’s Microloan Program The Farm Service Agency (FSA) developed the Microloan (ML) program to better serve the unique financial operating needs of beginning, niche and the smallest of family farm operations. Examples might include; direct marketing to restaurants and grocery stores, organic production, community supported agriculture (CSA’s) and farmers markets.

33. Fulfilling a Need Assisting applicants who have limited experience by providing them with an opportunity to gain farm management experience while working with a mentor; Eliminate use of high cost personal loans and high interest credit cards; Providing a bridge for Youth Loan borrowers to transition to larger-scale operations; Assisting the agricultural community by creating opportunities to start new businesses.

34. What is a Microloan Microloans are direct farm operating loans, either annual or term, that do not exceed $35,000. Microloans have a simplified application process and paperwork and verification requirements that are more proportional to smaller loans and operations.

35. Microloans can be used for operating expenses including but not limited to: • • Initial start-up expenses; • • Annual expenses such as seed, fertilizer, utilities, land rents; • • Marketing and distribution expenses; • • Family living expenses; • • Purchase of livestock, equipment, and other materials essential to farm operations; • • Minor farm improvements such as wells and coolers; • • Hoop houses to extend the growing season; • • Essential tools; • • Irrigation; • • Delivery vehicles. Micro Loan Overview

36. Different types of loans have different eligibility requirements. Some examples of these are: Being the operator of a farm, having sufficient managerial ability, be unable to obtain credit elsewhere but have an acceptable credit history, and are a U.S. citizen, non-citizen national, or qualified alien. For more information on general and loan specific eligibility requirements, visit our website at www.fsa.usda.gov or see your local FSA loan officer. Eligibility Requirements

37. Got Experience? • Applicants not meeting the general requirement for farm management and experience may still be eligible. • Alternatives include an apprentice relationship; past participation with organizations such as FFA, 4-H, Beginning Farmer programs, and Community Based Organizations; even prior small business management experience combined with a self-directed apprenticeship can allow applicant to start farming with a Microloan. Managerial Ability and Alternatives

38. Securing Microloans For an annual operating purpose, such as purchasing seed, fertilizer and other crop input costs, these loans are generally secured by the crop or products produced, however equipment or other security can be used. Loans for other purposes such as purchasing equipment or foundation livestock are usually secured by the equipment or livestock being purchased but other types of security can be used. All loans need adequate security.

39. Applying for a Loan You may obtain the forms for a loan application by visiting your local office or from the FSA website at http://forms.sc.egov.usda.gov/eForms/ welcomeAction.do?Home. Your FSA loan officer can provide assistance in completing the FSA forms or can identify other sources of assistance in your area. You may submit your application by: • calling for an appointment with an FSA loan officer; • mailing, faxing, or delivering your application to your local FSA office; or • electronically submitting your application if you have registered through the e-gov system.

40. Are a direct operating loan with a maximum loan amount of $35,000. Have a shortened application process and reduced paperwork. Allow some applicants that do not currently meet the experience and managerial requirements to qualify through a self-guided mentorship. In Summary: Microloans

41. Provide some flexibility in loan security; Assist the agricultural community by creating opportunities to start new businesses; Fulfill financial operating needs of beginning, niche and the smallest of family farm operations. In Summary: Microloans