Farm Financing: How To Get a farm loan with bad credit?
All businesses are run with a certain level of risk, but the farming industry, in particular, is subject to a lot of uncertainty. That’s where farm financing comes in which allows farmers to sustain their business and take it to the next level. Aside from that, on top of the regular risks of a typical business, farmers are forced to deal with make or break factors every year that are essentially out of their control.
For example, an entire year’s crop could be lost due to a bad turn of weather; or an essential piece of equipment costing tens of thousands of dollars could unexpectedly break down.
Farmers of both livestock and produce are also at the mercy of the food markets. If the cost of beef or carrots goes down by 40%, it’s the farms that suffer the most.
Why do farmers need financing?
If you look at the majority of farm business models, you will see that most rely heavily on flexible access to credit. While farmers might have a lot of net worth, due to the amount of collateral that they have in terms of land, equipment, stock, etc. Most of their money is tied up in these assets, making it difficult to get by when cash flow is at its lowest.
Farming by nature is seasonal, and there are not many industries within farming that offer a constant and consistent income, which is why so many require financing on a regular basis.
Farmers need capital to buy/pay for stock, seeds, staff, equipment, fertilizers, and so on, which will eventually be used to turn them a profit. When they sell what they have farmed, the profit is used to pay back the loan, and then the rest is used to live off.
So why are farmers having trouble securing finance?
There might be more people on this planet with every year that passes, but the farming industry is seeing the complete opposite of an increase in sales.
Average farm income has halved since 2013 and doesn’t look to be on the rise any time soon, which is very worrying for both farms and lenders.
The reason why the farming industry is in decline is not because of a lack of food demand, but instead an increase. The rise of the population has seen an influx of ‘super farms’ that completely dwarf the average holding in the united states. These super farms can grow more food for cheaper, resulting in the smaller guys not being able to compete on price.
As the profitability of the smaller farms decreases, so does their ability to pay back credit and in turn, their credit score/ loan eligibility.
Traditional lenders are becoming more and more reluctant to offer loans to farmers unless they can demonstrate consistent profits, and/or put up substantial amounts of collateral.
Types of bad credit farm loans?
One of the most popular bad credit financing options is short term business loans. Short term loans, as the name suggests, are taken over a short period of time, usually between 3 and 12 months. The loan amount depends greatly on the needs of the business, as well as:
- The financial health of the business.
- The lenders you’re borrowing from.
- The reasoning of the loan and the funds will be spent.
Interest rates also vary greatly lender title loans WI to lender, but you can usually expect to pay between 5% – 10% interest on the initial amount borrowed. Those who have bad credit might see an increase in this percentage, although, businesses with bad credit stand a good chance of being able to secure a short term loan.