Farm operating loans and line of credit loans are a financial lifeline to most working farm operations. A farm operating loan or line of credit is revolving debt that can be borrowed and paid back to fund the yearly operating costs of farm operations. Typical farm operating expenses include: seed, fertilizer, labor, irrigation, tillage and harvest. Farm Operating Lines of Credit can help a farm operation manage its working capital and maintain adequate cash on hand.
Few lenders will allow new equipment and asset purchases to be expensed on a farm operating line of credit. Most operating loans are on an annual renewal basis with capital being provided by local farm banks that loan officers oversee the farm input costs and expenses. The amount of operating capital required can vary significantly on an annual basis due to fluctuating costs of fertilizer and the crops grown. Annual estimated expense budgets help farm operators determine their estimated input cost based on the plan for the operational year.
Farm Operating Line of Credit Rates
Interest rates for most operating lines of credit are adjustable rates with margins based on the banks cost of funds whom is providing the operating capital. The most common two indexes used in determining pricing/interest rates for most operating loans are the WSJP (Wall Street Journal Prime Rate) and the 1-month LIBOR Index (London Internal Bank Overnight Rate). Historically from 2010-2013, the WSJP rate has maintained steady at 3.25%. A typical bank margin for an operating line of credit is between 1%-3% over WSJP. A margin that a typical farm operator can expect to obtain will depend on the credit quality and collateral being offered to the bank as security for the loan. Historically from 2010-2013, the 1-month LIBOR Index has maintained levels of under .5%. Typical margins for the 1 month LIBOR Index are between 2.5%-5.00% depending on credit quality and collateral.
Collateral for a Farm Operating Line of Credit Loan
Typically, the collateral for a farm operating line of credit includes the investment in the current crops grown and the accounts receivable associated with harvest of such crops. In addition, most banks will require additional collateral such as livestock, farm machinery / equipment, and any other farm assets owned. Most banks will not finance over 50% of the value of the assets pledged as security for a new farm operating loan. The bank will file a state UCC filing to secure the assets pledged as collateral for the loan and place a lien on the asset.
Somewhat uncommon are operating loans secured with farm real estate. These operating loans have significant benefits to most farmers with adequate equity to obtain a loan based on the equity in their farmland. Loan terms are often extended over the typically annual loan renewal terms and can be extended upwards of a period of 10 years. However farm operator should caution and be aware of any annual requirements for financial statements and tax returns as if an operation follows below certain predetermined profit levels the banks risk tolerance many freeze or cancel any undrawn funds based on the promissory note agreement. The benefits of a longer term and real estate based operating loan is having longer term availability to obtain capital and not having to rely on bank loan committees to approve annual operating capital on an annual basis. Farm operating loans secured by real estate often also have lower rates and no annual fees however the cost to obtain a real estate farm operating loans cost can be higher with an appraisal and title insurance to be paid at a typical mortgage closing.
Importance of Adequate Working Capital
The importance of a farm operation having adequate working capital cannot be understated. Without adequate working capital, a farm operation will not have cash on hand to purchase vital resources such a fertilizer and pesticides during the crucial growth stage of crops. Not having an adequate operating line of credit or adequate working capital is the number one reason for default and bankruptcy for farm operators.
Farm Plus Financial leads the farm industry with the most competitive rate on their farm operating loans and farm credit loans. Call Farm Plus Financial today at 866-929-5585 or apply for a farm operating line of credit loan online with our easy online Farm Loan Application.Apply Now