Financing is often a necessary part of running a successful farm or agribusiness. Whether you're getting your first crop in the ground or expanding a multi-generational operation, it’s important to know what kinds of agricultural loans are out there and how to pick the best loan for your farm’s needs. Understanding important basics like loan terms, interest rates and what funds are typically used for can improve your confidence in your selection.
Here are five key features of agricultural loans you should understand.
1. Agricultural Loan Terms: Long-Term vs. Short-Term
Agricultural loans are typically categorized by their repayment duration:
Long-Term Loans
These are used for major investments like purchasing farmland, constructing buildings or acquiring large equipment. These loans often have fixed interest rates and repayment periods that span more than 10 years.
Short-Term Loans
These are designed to cover seasonal or operational expenses such as seed, fertilizer and labor. These loans usually have variable interest rates and are repaid within a year or less.
2. Agricultural Loan Interest Rate Types: Fixed, Variable, and Adjustable
Choosing the right interest rate structure is essential. Three of the most common rate types are:
Fixed Rates
These rates stay the same throughout the life of the loan, offering predictability and stability. Fixed-rate loans are ideal for long-term investments, and are available for terms up to 25 years.
Variable Rates
These rates fluctuate with market conditions, and while they may start out lower than fixed rates, they can rise and fall each month. That’s why variable rates are more suitable for short-term loans or borrowers who plan to repay quickly.
Adjustable Rates
This type of rate begins with a fixed-rate for a set period (e.g., 3 or 5 years), then adjusts periodically. This rate type offers initial stability with future flexibility and is often seen as strategic “middle ground” when it comes to financing. Adjustable interest rate periods can be from one to 15 years.
Indexed Rate Types
This type of interest rate adjusts based on well-known market indexed rates, such as the Wall Street Journal Prime Rate and the Chicago Mercantile Exchange (CME) Secured Overnight Financing Rate (SOFR). After closing, rates may change monthly by adding or subtracting a set margin to the index rate, and this margin may be updated annually.
3. Loan Purpose: What Agricultural Loans Can Be Used For
Agricultural loans can support a wide range of needs:
- Farm Real Estate – Buying or refinancing farmland
- Operating Expenses – Covering costs like seed, feed, fertilizer, fuel, and labor. These are typically single year loans that are renewed annually.
- Equipment – Purchasing tractors, combines, irrigation systems, and other rolling machinery
- Farm Improvement – Designed for improvement projects like grain bins, shop buildings, fencing and field tiling
- Livestock – Purchase livestock or animals raised for agricultural purposes
- Farm and Personal Vehicle – Purchase or refinance vehicles used on your operation
- Family Needs – Used to quickly finance things like living expenses, nursing home costs, medical bills or taxes
4. Tips for Choosing the Right Agricultural Loan
Here are some practical tips to help you select the best loan for your operation:
Assess Your Needs
Start by identifying what you need the loan for: equipment, land, operating costs or something else. This will guide the type and term of the loan.
Understand Your Cash Flow
Choose a repayment schedule that aligns with your income cycles. Seasonal businesses often benefit from flexible payment plans.
Compare Rate Structures
Consider how interest rates will affect your long-term costs. Fixed rates offer more stability, while variable and adjustable rates may offer savings if market conditions are favorable.
Evaluate Risk Tolerance
If you prefer predictable payments, a fixed rate loan may be best. If you're comfortable with some uncertainty and want to take advantage of lower initial rates, variable or adjustable options may be a better fit for you.
Look for Specialized Programs
New or beginning farmers may qualify for programs that offer lower rates, financial education or more flexible credit standards.
Work with a Trusted Advisor
A financial advisor or loan officer familiar with agriculture industry knowledge can help you navigate your loan options and recommend a solution tailored to your operation.
5. Additional Benefits to Consider When Choosing an Agricultural Loan
Beyond the loan itself, some lenders offer added value that can make a big difference over time:
Patronage Program*
If borrowing from a customer-owned cooperative, eligible borrowers may receive a portion of the lender’s earnings back as a cash distribution called patronage. This can effectively lower your cost of borrowing and strengthen your financial position. These payments are typically based on the borrower’s contribution to the cooperative’s net income and can be used to reinvest in the farm, pay down debt or offset operating costs.
Loan Conversion Options**
If improving market conditions result in lower interest rates, some lenders offer a loan conversion program that allows borrowers to switch to a lower interest rate without going through the process of refinancing. This option often involves a simple processing fee and does not require re-qualification. It can be a cost-effective way to lock in a better rate or adjust your loan structure as your needs evolve.
Young and Beginning Farmers
The barriers for young, beginning and first-time farmers can feel overwhelming. Programs specifically designed to serve this important demographic of farmers are designed to help them gain access to capital with modified credit standards. Many of these programs also offer educational courses that build the financial knowledge and skills needed to build strong, resilient operations.
Financial Education and Support
There are additional programs available that provide farmers with access to financial training, mentorship or planning tools to help them build more sustainable operations.
Relationship-Based Lending
Working with lenders who understand agriculture can lead to more personalized service, flexible terms and long-term partnerships that will grow with the operation.
Agricultural loans are powerful tools that can help farmers grow their operations, manage seasonal demands, and invest in the future. By understanding loan types, rate structures, and how to choose the right financing, you can make confident decisions that support your long-term success.
Ready to Take the Next Step?
Whether you're planning for the next season or the next generation, Farm Credit Mid-America is here to help you finance what’s next. Explore our loan options, learn more about our Patronage program, or talk with a local financial officer about how our flexible loan structures—including conversion opportunities—can support your operation.
Loans subject to credit approval. Additional terms and conditions may apply. Farm Credit Mid-America is an equal opportunity lender.
*Patronage is an annual decision made by the Board of Directors to return earnings to eligible customers. Learn more about patronage and patronage eligibility.
**Conversions subject to eligibility requirements. Conversion has a one time fee of $750.00. Fee is subject to change. There may be additional fees associated with the conversion, such as a wholesale conversion fee.
***Growing Forward® is a registered trademark of Farm Credit Mid-America.
