Creative Ways To Finance Your Farm
March 15, 2024 For all the entrepreneurial hats a grower might wear these days, there are just as many options toward financing those endeavors, says to Andy Larson, the Farm Outreach Specialist with the Food Finance Institute (FFI), a part of the University of Wisconsin’s Institute for Business and Entrepreneurship.
“I love working with all different kinds of farmers, all different stripes of farmers,” Larson says. “Many of the folks that are attracted to FFI tend to be the types that have very alternative types of tendencies. They’re trying to be farmers and retailers and distributors and processors and restaurateurs — because we’re all crazy people, and we don’t feel like we have enough to do.”
Here are some of the unique financing opportunities available to growers, Larson spoke of during a webinar presented by the Wisconsin Farm Bureau:
Seller Financing: “This is the best win-win for most folks. When there’s a transfer of an asset between somebody in the family or somebody very close, and both members know one another, trust one another, then basically the owner of that asset acts as the bank, and they receive payments from the buyer. You’ve seen this happen on a relatively frequent basis around the Upper Midwest for parents selling their children equipment or parents selling their children a parcel of land. It’s becoming more common between unrelated parties as well as for folks using an apprenticeship type of approach if they weren’t born into a farm family but want to get into agriculture. It’s cool because it’s flexible. The rates are usually really low, so it’s pretty favorable. Concessionary capital, I would call it. And an interesting thing is that seller financing can actually be guaranteed by the FSA, so if you are an existing or aspiring Farm Service Agency customer, this can be one way to use them.”
Online Financing: “There are a million different varieties and flavors of this right now, and there are some that are specific to agriculture (such as Steward). Everything like that up to credit card companies. I used a Discover personal loan to buy my pickup because the rate was attractive. I already had an existing account with them, it was simple, and I paid it off early. Despite the fact that the rate was higher, I didn’t have to put any collateral down, and they did not get the VIN from my truck when I was buying it. That felt kind of good, and I was willing to pay a couple extra points of interest for it — but that’s when interest rates were lower than they are now. The thing that I don’t like about it is that I don’t know the person that’s going to answer on the other end of the phone if I have a problem.”
Dealer Financing: “Anybody who’s bought some iron over the course of the last few years has probably had a piece of paper pushed in front of them that said, ‘Hey, we can finance this thing right here.’ You go to your local equipment dealer, and they might have their own financial kind of service if they’re part of a larger order brand. Oftentimes they’re going to be able to do it quickly. They’re going to maybe run a credit check on you to see what your score is. They’re going to have pretty competitive terms most of the time. They might even be lower than what your local bank is on a piece of equipment. But because it’s so quick and easy to do all of that stuff, there is a limitation, which is it’s pretty easy to get in over your head. So, make sure that, in your overall financial picture, you’re paying a monthly payment or a quarterly payment that actually fits into your cash flow. That’s the kind of thing that a bank would do. They would make double-darn sure that you can afford this thing before they are willing to extend you the credit for it.”
Capital Leasing: “A lot of OEMs and dealers have gotten into capital leasing because price tags for stuff have gotten so freaking high. Some folks, in order to get around that down payment gap, are using capital leasing to get started in the ownership of an asset and then eventually graduate into standard-term financing. This is different from an operating lease. An operating lease is a true lease. You’ve got so many months or so many years that you’re going to have access to using this thing, and then you’re going to give it back, and you’re going to pay a certain flat amount for that use. Capital leasing is more like a rent-to-own kind of plan. You’re paying so much per year in order to have access to this capital item. You don’t have any money down, which is cool, but you have an interest rate baked into what you’re paying on your capital lease that’s higher than what a regular loan would be. You have to be aware that there’s a trade-off here. At the end of the leasing period you have the option to convert a certain percentage of whatever cash you paid in lease payments to convert to asset ownership and then apply for traditional term financing. In that circumstance it’s a really nice way to get into a big-ticket item without that big cash-on-the-barrelhead down payment, but you’re going to be in a longer period before you get into greater ownership of that asset.”
Grants: “Here’s the No. 1 thing that gets brought up when folks approach me: ‘Is there a grant for me to do this thing?’ The answer is usually ‘No.’ But we in agriculture have a unique opportunity to attract grant dollars that many other sectors do not have the opportunity for. It’s not necessarily easy. It’s not necessarily second nature to many of us, but they do exist. You can write a competitive application for these funds, and maybe you get them and maybe you don’t. It depends on how competitive the pool is that year. Most of the time a grant is going to be for something that has some public value — some research, some outreach or teaching, or for the type of working capital you need to grow your brand or grow your business. You have to have your paperwork in order. They’re going to ask for financials, they’re going to ask for a good story, a good pitch, a good application. And many of them are requiring matching funds or cost reimbursement or both. If you’re applying for a $100,000 grant, you’ve got to demonstrate that you’re going to throw $100,000 at this project, too, and it’s not just going to be the federal government or the private foundation or whoever else it is. The other thing is most of the time you’ve got to eat that expenditure first. You’ve got to buy whatever the thing is and then you submit it for cost reimbursement. So it does require some capital to get into this free capital as well.”
Economic Development Financing: [This] can come from a lot of different sources. In my neck of the woods, the Southwest Wisconsin Regional Planning Commission has some economic development funds through a revolving loan — pretty cool, pretty concessionary, easy terms. It’s a good thing. For better or for worse, these things often come with technical assistance, which means you are going to be meeting with a muckety muck like me on a regular basis to see how everything is going in your farm business from a financial standpoint. Rates can be pretty high, but all the rates are high now. Before, when everything was super-duper low a couple of years ago, some of these economic development funds seemed pretty uncompetitive from a rate standpoint, but now, when everything’s in the 8’s, it doesn’t look like quite as big a differential.”
Conservation and Ecosystem Services: “This is going to become a growing thing in our agricultural community and our agricultural economy. We’re going to see more opportunities to get paid for conservation and ecosystem services. We already have some opportunities out there right now. The NRCS has all these neat cost-share programs, but you’re going to see more options as we continue to move forward. Folks who are doing rotational grazing, folks who are doing cover cropping or long crop rotations, folks who are doing solar energy, folks who are doing all these different things are going to start seeing these different kinds of opportunities. It could come in a lot of different forms: Sometimes it’s a direct payment, sometimes it’s a rent, sometimes it’s a cost share, sometimes it’s a tax rebate. But they’re all trying to encourage some kind of ecological good.”
Government Financing: “If you’re not familiar with the Farm Services Agency, they’re a wonderful place to get into your first ag loans. They’re not the easiest place to stay with for your entire agricultural career because part of their mandate is to graduate you to conventional financing once you’re eligible. But they do have favorable rates. Yes, they have gone up in the last couple of years just like everyone else’s have. Also it is sometimes easier to use the FSA in collusion with a traditional bank. If you’re going to do joint financing, it’s really wonderful to have the FSA cover 50% and the conventional bank cover 50%. Or if you’re a beginning farmer, there’s a 5-45-50, where the bank puts down 50% and the FSA puts down 45%. Really very attractive, but you need to have three years of production experience or management experience under your belt. It’s easier when you’ve got three years to schedule out, so it’s not necessarily going to be the very first thing you do when you start farming.”
Unbank Financing: “There are more and more of these “unbanks” out there nowadays. If anybody has ever gone to the Regenerative Food Systems investment Forum website, there’s a lot of capital out there for what people are calling regenerative ag. I don’t know a better term to call these things other than unbanks. They’re not banks, but they are financing, there are loans that are coming through these recently created organizations. They’re more mission driven. Some of them specialize in leasing. Some of them specialize in more traditional lending. Most of them are going toward small sustainable, regenerative, or alternative type of agriculture. It is going to be a higher touch relationship, but along with that higher touch comes a lot of flexibility. I’ve seen a lot of people get terms extended, get payments delayed, things like that if something goes wrong because they’re doing something experimental. Many of them are limited to organic certification right now. I think that’s going to become less and less as we go along. The proportion who require organic certification is going to go down because there’s other types of certifications out there. It’s just an easy line in the sand to draw.”
Patient Capital: “Some people are interested in getting investors in their farm business. It’s not common in the agricultural world — with one exception, the outside investors buying farmland and expecting a return on that. We’ve all seen that. These are not quite the same kind of things. “Impact investors,” I would say, is the is the normal financial term for them. They’re trying to get some kind of broader order societal benefit created by investing in some kind of alternative agriculture. Slow money is the one big example that’s out there, and they’re still self-organized around specific groups or specific cities that are interested in specific things. Sometimes we have one that fits great. We’ve got a chapter in Madison that’s been around for a long time and invested in agriculture. We’ve got one in Chicago, but it’s not necessarily going to be for everybody who’s way, way, way outside those metropolitan areas.”
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Equity Investment: “The thing that’s funny about equity investors is that there’s not a real common template that you can lay over this business relationship, this financing relationship. Every investor wants something just a little bit different. Your traditional investor in Silicon Valley or whatever wants to get into a brand new company that’s never been around for very long and wants to get on the front end of this logarithmic growth curve and just see their money grow by leaps and bounds in the first few years, have a big chunk of this thing, and then force them to sell for a bazillion dollars or have an IPO or whatever. Farming is a little bit different. We don’t usually have those kind of logarithmic growth experiences that your Silicon Valley types might occasionally have. We’re oftentimes living on the places that we’re financing, so there’s a lot tied in between personal and business whether we like it or not. Some of these investors are going to be in it for the good, they’re in it for the impact, and they don’t require a whole lot of return or ownership or say; and some of them are going to be, like, ‘No, I want to be active in this. I want to make sure your business grows, and I’m going to give you advice and expect you to follow it over the course of your business.”
On the smaller or “ground floor” side of financing, Larson cites:
Bootstrapping: “It’s a silly metaphor, but it’s common, and people know what you mean. Basically, this is using your own personal savings, using friends and family in order to fund your startup. Now, oftentimes mixing business and family is a thing that people don’t want to do, but we in farm country do it all the freaking time. We think that just because we’re related that we should be in business together, so maybe that’s not as much of a downside for us folks that are farmers.”
Crowdsourcing: “A lot of people have heard of Kickstarter and Indiegogo and GoFundMe. There’s now one called Givebutter, which I thought was kind of cool for the Dairy State. There’s a million of these out there. They’re OK, they’re legal, they’re you getting personal investment from folks who support the kind of thing that you want to do. You have to pitch yourself. This has to be the type of thing that looks really good to them, and you have to spend some time doing the marketing and communications. It’s not like there’s a ton of folks on any given day surfing Indiegogo looking for things to throw money into … and I haven’t heard of a lot of farmers getting a lot of cash that way. My advice on these is to use them sparingly and only use them for low dollar amounts. Don’t do it frequently — maybe once or twice over the course of your career.”
Microfinance: “These tend to be really small loans, and they tend to be to entrepreneurs who are underbanked. Most of these were developed for international economic development for poverty alleviation — getting people into agricultural assets so they can start bootstrapping their lives so to speak. That emphasis on poverty alleviation isn’t going to be necessarily for somebody who’s passed the first stage of their career development in agriculture.”
Financing Hurdles to Clear
Growers should consider alternative financing for a variety of reasons, Food Finance Institute Farm Outreach Specialists Andy Larson Larson says. For starters, they might not yet be bankable.
“They don’t have a lot of experience. They haven’t got a lot of collateral to their name,” he says. “They don’t own a lot of stuff that the bank will collateralize, and they may not have very much in the way of a credit history, or it could be a short credit history, or it could just be a no-score type of credit history because they’ve never had consumer debt before.”
They might have higher-risk credit profiles because of low net worth, unfamiliar collateral (such as certified organic fruits and vegetables or aquaculture), recent bankruptcy, or low liquidity. “This could come from, again, not owning a lot of stuff and maybe coming out of school with a whole bunch of student loans and a loan on a pickup truck and just not a lot of assets to speak of,” Larson says.
Finally, growers might need gap financing — short-term loans for the purpose of meeting an immediate financial obligation.
“Banks don’t want to finance 100% of what it is you need to get your project done,” Larson says. “If you want to buy a $100,000 tractor, there’s a really good chance the bank will only get you 75 or 80,000 bucks. In certain circumstances there are ways to get up to that $100,000 … but those loan de-value limitations become a problem, especially as you get into larger and larger projects.”
Larson recommends doing business with smaller, state-run community banks and farm credit service systems.
“It would be ideal to have somebody that knows you, and that’s why so many people start with their hometown bank,” Larson says. “Not every bank specializes in agriculture. There are some banks that just don’t want to touch it with a 10- foot pole, especially the big banks – your 5/3’s and your Wells Fargos. Those are harder to do agriculture with because they’re unfamiliar with that industry or that sector.”
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