January 25, 2016
Access to credit continues to be an urgent need for farmers across the country, especially for small and beginning farmers. Starting a new farm is not unlike starting any other small business–it can require significant upfront capital to get off the ground.
USDA recently announced exciting changes to their Microloan Program, including launching a new Direct Farm Ownership Microloan, which will streamline and quicken the loan approval process for smaller real estate loans.
This announcement builds on USDA’s Farm Service Agency (FSA) efforts to bring more beginning, diversified, and local food producers in the door by offering resources that make sense for their scale of operation, production system, diversity of products grown or raised, and markets served.
About FSA Farm Ownership Microloans
The U.S. Department of Agriculture has been known as the “lender of last resort” since the federal agency first got into the loan-making business back in the 1930s, though in recent years the agency has changed its motto and operating principle to the “lender of first opportunity.” In the last few years, FSA has expanded funding and improved credit options, increasing the number of farmers served. This includes the microloan program that NSAC played a major role in getting authorized for the first time as part of the 2014 Farm Bill.
Since first launching FSA Microloans for farm operating loans, the agency has made 16,842 microloans to farmers, totaling $66.1 million dollars in FY 2013, $98.3 million in FY 2014, and $209.4 million in FY 2015 and the first quarter of FY 2016.
With the launch this month of Direct Farm Ownership Microloans, FSA aims to make farm ownership loans more available and attractive to small operators. The new ownership microloan program will offer reduced application requirements, more timely application processing, and added flexibility for Youth Loan borrowers in meeting the farm experience eligibility.
It is intended that these smaller loan amounts (up to $50,000) will provide substantial assistance to small operations, such as beginning farmers, truck farmers, and niche-type operations. The loan program is also ideal for those who have demonstrated financial and business experience through the successful repayment of a Youth Loan. These smaller farm operations tend to have difficulty obtaining real estate financing from other types lenders, who are unlikely to make loans in such small amounts or support less traditional farm operations.
Eligibility and Loan Terms
In order to be eligible for either the ownership or operating microloans, a farmer must be unable to obtain sufficient credit from other sources and have sufficient farming experience, acceptable credit history, and adequate collateral for the proposed loan.
The Direct Farm Ownership microloan can be used to finance the purchase of a farm, enlarge an existing operation, construct new farm buildings or improve structures, pay closing costs, and promote soil and water conservation and protection. While $50,000 will only get a farmer so much land, for those looking to purchase a few more acres to diversify their operation or securing just enough land for a hoophouse or urban production, these smaller loans may be a perfect fit.
In addition to real estate, the new ownership microloans might also be useful for those looking to borrow for a down payment or to add a building or other infrastructure to an existing farm. They can also be used in combination with commercial credit such that a young farmer could secure two loans of equal size, one from the government and one from a bank or other lending institution.
Similar to the existing Farm Operating Microloan program, farmers who apply for a Farm Ownership Microloan will have additional flexibility in providing required financial documentation. For example, farmers who are just starting out and don’t yet have an established crop or yield history, or are diversifying and adding a new enterprise on their farm, will be able to provide other forms of documentation –such as sales receipts, financial statements, contracts, and tax returns — to confirm projected revenues and sales.
Repayment terms for the new Microloan have also been adjusted to better suit small and beginning farmers. Terms for Farm Ownership Microloan will be 25 years, much shorter than the traditional 40-year loan term for standard FSA ownership loans. This change is intended to help farmers more quickly build equity in their farm real estate. Annual payments for this loan will be similar to Direct Ownership Loan payment installments, but Microloan borrowers will benefit from paying less total interest on the life of the loan. Hopefully this change will help small operations endure through the start-up phase, move on eventually to FSA Direct Ownership Loans, and finally to graduate to commercial credit.
For more information on microloan eligibility, check out NSAC’s Grassroots Guide.
How To Apply?
FSA is creating a new application process for Microloans within its existing Direct Farm Ownership Program, and will make these loans out of the Direct Farm Ownership appropriation, as decided by Congress each year.
The Farm Ownership Microloan application form is the same one used for farmers applying for Microloans through FSA’s Direct Operating Loan program. This form is intended to capture most of the information needed to process a microloan, including sections for the applicant to describe farm training and experience. It also reduces and simplifies the financial statement.
What’s Next for Microloans?
In an agency-wide effort to expand loan programs to meet the needs of all types of farmers — including those who have never stepped foot inside their local FSA office — FSA anticipates launching another expansion to its Microloan program later this spring.
This program will be targeted to those smaller farm loans that are made by private lenders, but guaranteed by USDA. These Guaranteed Operating and Ownership microloans will feature a more streamlined application process, require less paperwork, and decrease the amount of time to approve a loan. Changes are expected to be rolled out later this spring, and will be part of an ongoing effort of FSA to get more private lenders interested in making small farm loans.
With FSA already conducting training of its field staff on the new streamlined application process for guaranteed microloans, proposed regulations are expected to be out later this month. This means that local banks across the country should be ready to take advantage of guaranteed microloans later this spring!
Increased Demand for Loans in 2016
Thanks to FSA’s commitment to growing their loan programs alongside the changing nature of the farm sector, farmers of all kinds now have more options than ever to help the finance and build their farming operations. Whether an established farmer looking to grow, or a new farmer just starting out, FSA is working hard to continue creating new loan programs and train their loan officers and field staff to meet the financing needs of all farmers.
It should be noted, however, that there is increasing interest in and need for federal farm loans. Private lenders have been more hesitant last year and this year to make short-term operating loans due to the downturn in commodity prices, which means more farmers are turning to FSA. In light of that fact, NSAC urged congressional appropriators to increase funding levels, particularly for operating loans in the FY 16 omnibus appropriations bill. Unfortunately, funding levels were kept level in that bill, and with increasing FSA loan demand, there will no doubt be a shortfall in the coming year. If demand levels for these loans continue, FSA will likely run out of funding for direct farm operating loans by summer.
As wonderful as these new microloan programs are, they are useless to farmers if funding runs out. Looking ahead to 2017, NSAC will be on the Hill, urging legislators to rectify this shortfall in loan funding so that our nation’s farmers can continue growing next year.