Agribusiness Guide to Financing

Imagine this: Your tractor breaks down during harvest season or you find the perfect location for your agribusiness. How do you pay for everything you need when you don’t have enough cash on hand?

When you know your financing options, it’s easier to decide whether loans, lines of credit, credit cards, or other options are the right choices to cover your needs and make your vision a reality. This guide to seven common types of agribusiness financing, along with their pros and cons, will help to define some common loan types used by agribusinesses.

Funding your agribusiness: Financing options that work

1. Lines of credit

A line of credit is similar to a credit card—you borrow against the line of credit up to a certain limit and, as you pay the balance down, the resulting available credit can be used again. Interest is only charged on the amount of the line of credit you use at any given time.

• Pros: This provides quick access to funds for operating and other expenses. It’s ideal for shorter-term and seasonal expenses, like seeds and fertilizer, that are paid off after harvest. Most lines of credit are renewed by lenders annually.

• Cons: Lenders can close lines of credit if they feel the credit line isn't used responsibly. Also, due to higher interest rates, lines of credit shouldn’t be used for major purchases or long-term investments—in these cases, you’re better off with a term loan.

2. Term loans

Term loans provide a lump sum of money that you repay through fixed monthly payments, including principal and interest, over a specific period of time (a car loan is a common type of term loan). The repayment period, or term, for farm loans and other ag loans is typically 1-7 years and is determined by the lender or the type or use of a loan.

• Pros: Term loans are great for equipment purchases, working capital, and infrastructure improvements such as machinery or efficiency upgrades. Predictable payments make them easy to budget.

• Cons: Term loans often require collateral to secure the loan. When equipment is purchased with a term loan, that may be sufficient; otherwise, you may need to provide additional collateral. Term loans can be less flexible than lines of credit.

3. Commercial mortgages

Similar to home mortgages, commercial mortgages can serve as farm land loans or may be used for other real property purchases for your business. These require regular payments covering principal, interest, and fees or closing costs that may be rolled into the loan.

• Pros: Most agribusinesses don’t have enough cash to purchase farms or facilities outright. Commercial mortgages make it possible to own your property over time with fixed payments.

• Cons: Commercial mortgages require down payments of 30-40%, although this can be reduced to 10-15% by using the SBA 504 program. The property serves as collateral, so you must stay current on payments to avoid foreclosure.

4. Equipment loans

Equipment loans are term loans that finance agribusiness-related machinery and vehicles. They’re available through several lenders, including equipment dealers or manufacturers, banks, and not-for-profit agribusiness lenders, like HVADC.

• Pro: It may be easier or quicker to obtain financing through dealers and distributors, which can help you get the equipment you need.

• Con: The interest rates from manufacturers and distributors may be higher, so it’s wise to explore financing through other lenders, too.

5. Credit cards

Credit cards are the easiest way to access financing and for new businesses, and for some, they may be the only initial financing available. The key to using credit cards successfully is to have an exit strategy—a plan to convert high-interest card debt into more affordable term-loan financing.

• Pros: Credit cards offer immediate purchasing power. When they are used responsibly, they can help you build a strong credit history.

• Cons: Interest rates are typically high, making them expensive for longer-term financing. Maxed-out cards can leave you unable to access additional credit when needed.

6. Receivables loans

This specialized financing enables businesses to borrow against money they expect to receive from customers with outstanding payments.

• Pro: While less common in farming operations, these loans can bridge cash-flow gaps for an established business with a strong customer-payment history.

• Cons: These loans tend to be more prevalent in service-based businesses than product-based operations. They often include high interest rates.

7. High-interest-rate, low-documentation loans

These require less paperwork but charge higher interest rates and are most commonly offered by online-only lenders. While legitimate, they're typically used when other options aren't available or when money is needed very quickly. As with credit cards, you should have an exit strategy to refinance high-cost loans into a more affordable option quickly.

• Pro: The streamlined process and quick approval can help in urgent situations.

• Con: The high costs mean they should be used cautiously and only for short-term needs. With a proliferation of neo-banks and online lenders, care should be taken in researching reputable lenders.

Here’s how different types of funding could be used

Now that you understand the kinds of financing available, here’s an example of how an agribusiness might use them:

• Credit cards are helpful for small things, like office supplies, that can be paid off each month.

• For purchases made a few times a year, like animal feed or seeds, a line of credit is a good option. The interest rates will be lower than for credit cards and when payments are made, the credit line will increase again.

• Term loans are great for financing expensive purchases, like equipment. They have lower interest rates than lines of credit or credit cards and longer repayment terms, which makes monthly payments easier to budget.

Taking the first steps to get funding

Before you apply for loans or lines of credit, create a budget that shows how financing can make your business better. Banks and other lenders want to see that you've thought carefully about how you'll use your funds and earn enough to pay them back.

It’s also a good idea to show your plan and financial projections to someone outside of your business, like an accountant or agribusiness advisor before approaching a lender. They may see things you missed or have helpful suggestions.

Then, before you apply, talk to different banks and lenders so you know what they offer and what they need from you. You want to find good rates and terms, as well as lenders who understand agribusinesses. This is important because they’ll know why you might need more money before harvest time or how weather affects your business, for example.

Take your time to find the right fit, just as you would when hiring employees or buying an important piece of farm equipment. The right lender and the right funding can make all the difference.

HVADC offers farm loans and agribusiness financing

Whether you're just starting your agribusiness or are ready to expand, you can find the funding you need to succeed. The key is to plan carefully and make smart financing choices to support a profitable and growing business.

HVADC can help through the Agribusiness Loan Fund. The fund offers a range of loans tailored to the specific needs of farms and agribusinesses in New York’s Hudson Valley region, including working capital, equipment purchases, real estate, leasehold improvements, business expansion, and bridge/gap funding.

When you’re ready to explore funding options, reach out to learn more about ways HVADC can help.