When it comes to buying land or a home with more acreage, the process can be a little more cumbersome than usual. Because the market is smaller and the prices are higher, sometimes real estate agents will require a loan pre-qualification before showing a property. 

We get a lot of inquiries from those looking to buy properties with acreage about loan  pre-qualifications and land loan pre-approvals - let us help you understand the differences between the two.

WHAT IS A LOAN PRE-QUALIFICATION?

A loan pre-qualification is a letter stating that you simply qualify as a loan applicant for an estimated amount and the individual property you’re inquiring about. In order to pre-qualify you for a rural property, we’ll request your name, address of the property and the property type. It is important to note that your credit will not be run, so the qualification for a loan amount doesn’t signify approval.

WHEN DO I NEED A LOAN PRE-QUALIFICATION LETTER?

A good time to request a loan pre-qualification is at the beginning of the buying process, when you're actively looking at properties and potentially ready to make an offer. During this time, you’ll discuss land ownership goals and any other potential financing needs with your loan officer. If your real estate agent is requesting a loan pre-qualification letter to view a specific property, it’s best if you know in advance, as these letters can take anywhere from one to three days to develop.

WHAT IS A LOAN PRE-APPROVAL?

A loan pre-approval is a more in depth and accurate indication of funding availability for a certain property. In order to get a loan pre-approval for a rural property, you’ll need to submit the same information needed for a loan application. This could include:

• Up to three years of tax returns
• A balance sheet or financial statements (assets, liabilities, including current loans, payment history, etc.)
• A copy of your driver’s license.
• Last 60 days of paystubs
• Copies of bank and account statements

If you’re ready to proceed with the purchase, you’ll also need to provide a signed sales contract. 

WHAT IS THE MAIN DIFFERENCE BETWEEN A PRE-APPROVAL AND A PRE-QUALIFICATION?

The main difference between a loan pre-approval and a loan pre-qualification is that a loan pre-approval will receive full analysis and outline the loan amount you could be approved up to, based on the purchase you are looking to make.

WHEN DO I NEED A PRE-APPROVAL FOR A LOAN?

A pre-approval for a land loan or mortgage loan will be needed if you’re looking to move quickly on a specific property or to make a serious offer. 

In rural America, no two properties are identical, and those classified as agricultural will be a little different from your run of the mill mortgage. A pre-approval for an agricultural land loan will be applicable to that individual property and no others. The loan pre-approval will translate into the loan application if you decide to move forward with purchasing the property. Please keep in mind that you may need to submit updated information if there has been a significant amount of time that has gone by between receiving the loan pre-approval and the acceptance of your offer.

Buying rural property can be confusing and overwhelming, but following through and owning your own piece of land makes the process worth it. We specialize in financing agriculture and rural America, so we’re ready to help you navigate this process with ease.

If you have a property in mind that you’re ready to call your own, give us a call today to speak with a loan specialist and request your loan pre-qualification or pre-approval.

Starting a business can be a roller coaster of emotional feelings – excitement to be on your own, finally following a passion, to the fear of the unknown, and anxiety thinking about what is needed to make it in the business. 

The best way to start, before jumping head first into a new venture that could change your world, is developing a business plan. This plan will help evaluate what you currently know about yourself and your future business, and help you communicate that to others. You’ll learn what is needed to make your business viable and profitable, as well as how to ask the hard questions to prepare for any bumps along the way.  Here are five tips for developing a business plan for your specific equine business.

1. Get Your Ideas Organized

Being organized is a virtue in life, but especially in a business setting.  Questions to ask yourself include “Why am I doing this?” and “What are my goals?”  Compiling a list of questions for yourself will not only help you evaluate what needs and wants you have for this new business, but also how to get there realistically. 

A business plan should look at the startup of the business through a minimum of five years of projections to consider all income and expenses your business will create.  Not only is this beneficial to you to be successful and keep you on track, but it also helps you when presenting your plan to others that will help you along the way (lender, attorney, financial adviser, etc.). 

2.Understanding Your Business Income and Expenses

At the end of the day, we need to know our numbers to be profitable and measure our success.  Being profitable means you covered all your expenses for the year and have funds left over to pay yourself and live the life you are dreaming of.  To do this, understanding your needs, not only financially, but accounting for literal everyday needs, will be vital in creating a successful business.

To start, make a list of all expenses you project your business to have (feed, bedding, labor, insurance, etc.).  Talk to similar businesses that are doing what you plan to do. Are you sure you are accounting for everything?  Always project a little higher on expenses to account for the unknown. That way, when major maintenance/repairs or other unforeseen issues arise, you already have a plan in place to account for those expenses.  Again, to be profitable is to plan for both the known and unknown.

Thinking about income, make sure to account for all income sources that will be part of the business (are you boarding horses, training, breeding, specialized care services, etc.).  They might not all be part of year one, but thinking long term into years two through five, there may be additional sources of income that have the capability to help offset expenses.  Make sure to have viable reasons as to why this income is projected to grow throughout the years. When compiling this information for a financial advisor or lender, they will need to understand your goals and how you plan to get there.

3.What Does Your Mission Statement Say About Your Business and Yourself?

You might ask – what is a mission statement? A mission statement is a formal summary of the goals and values of a company, organization, or individual. 

This is not something a lender or attorney would ask for per say, but something that should always be a part of a business plan to reaffirm what goals, values and services you are providing to your future customer base, who you wish to connect with, and how you plan to accomplish that.  Culture plays a large role in a mission statement, which in turn helps one to determine what the best fit for their business is, and how to shape that business around the right group of people to market your business to.

4. Ideas For Your Business Marketing Plan

Taking time to understand your target audience and business structure will allow you to develop a marketing plan that works for your needs and one you can stick to. Some items to consider would be:

• Where are your clients? Are they local and looking to be at your farm daily, or are they bringing in horses from across the state/country for your specific service? How will you reach them?
• Networking – Developing a network of trusted referral sources will strengthen your overall business. How did you get to where you are now?  Do you have a circle of close clients/friends who are able to refer work to you, or groups that have the same values in business as you do?
• Tell your story – The more personal you can be with your story and tell others how you started and what your business goals are, the more relatable you become to your ideal clients.
• Why would I want to bring my horse to YOU? – This will be an age old question moving forward in your specific business plan.  Why would someone want to take their horse, and its needs, to you?  What do you offer specifically that connects with their needs and values and develops trust in not only your business, but you as a person caring for their animal’s daily needs? 

5. Building Your Farm Resources

One other item to remember is your external farm resources.  These people and groups can (and should!) include your lender, accountant, attorney, and insurance professional (for your property, as well as liability for the business), just to name a few.  These people all bring different perspectives and expertise to the table to help you be as successful in your business as possible.  They have all seen businesses work and some that have not, so use them to your advantage and learn from their experiences to make your business sound and successful.

Third party perspectives can feel as if they are tearing your business plan apart and scrutinizing it. Take the constructive criticism and a step back at the same time.  Their goal is not to make you feel as if you cannot be successful in your new venture, but rather help you identify potential issues, and address them accordingly so they are not a problem down the road.

Although taking these first steps to develop this plan may seem overwhelming, remember: you have the passion, now you need the plan that will help you make it a reality.  Face your fears, talk to your resources, and don’t be afraid to ask for help.  Here at Farm Credit, we are more than a lender. We are a part of your community and a resource to help you become the successful business owner you have envisioned for yourself.

Getting a loan for your agricultural business — no matter the size or scope — means asking the lender to have faith in your ability to manage a full-fledged operation and your finances in a healthy way. The best way to prove that is by coming prepared with a farm business plan proposal.

No pressure, right? While it may seem daunting and scary, we’ve broken down the steps to writing the perfect business plan below. Read on to learn more and check out the end of this guide for additional resources to help you craft a top-notch business plan.

Creating a Farm Business Plan

You can set yourself up for success — both in business and with your lender — by having a detailed business plan for your farming operation. It doesn't need to be pretty, but you do have to prove that you're willing to put the time and effort into creating a well thought out course of action for your operation.

Are you already operating but don't have a plan? That's okay! It's never too late to put extra thought into how your operation will continue to fulfill your livelihood.

What to Include in your Agricultural Business Plan

Whether you're a new farmer looking for a loan, or a seasoned grower that needs funding for a new agribusiness, there are a few things that you want to make sure you include in your agricultural business plan.

Title/ Cover Page

Keep it simple on the cover page. The most important information here is accurate contact information so your lender can get in touch with you easily. Include your mailing address, phone, email, and fax if you have it.

Business Overview

Although it will be the first page of your farm plan, this will be the last section that you write, since it acts as a summary of all your key points in your plan. Remember that this is the first section that your lender will read, so they’ll expect to see all of the highlights that make approving this loan a good financial decision for both you and the lending organization. Include points about expansion plans, market opportunities, financial trends and projections in a short and easy to read summary. Treat this section as if you're telling a stranger about your operation and you want to give them an overview of what you do and what sets you apart from other businesses in your industry.

The What:

What are your key business objectives? In this part of your farming business plan, you'll want to describe your products and services your business will offer. 

The How:

Start by describing how your business will operate and include what makes your business unique. Provide details regarding the size of the operation, location, and note any expansion plans.   

The Who:

Who is your target audience? Who will benefit from your products or services produced from your farm business?   

The Why:

Think about the desire and drive behind why you want to pursue this business venture. It is common to connect your business why with your mission statement.  

If applying for a loan:

If you’re starting a new operation, clearly state how much money you are applying for, how you plan to use it and how it will make your business more profitable, thereby ensuring repayment. 

Creating your own farm business plan will take time and effort. As you complete sections, send them to partners or colleagues to review as you go along. If you have any questions on farm business plan examples or more specifically what lenders are looking for, give us a call. 

Business Management and Organization

Business History:

How long have you been in operation? Are you starting from scratch or did the business have previous owners?

Strengths and Weaknesses:

Describe the strengths and weaknesses of your business.

Implementation Timeline:

What is your plan of action? What specific tasks need to be completed in order to reach your business goals?  

Goals:

Goals are often broken into two categories — short term and long term. Short term goals are focused on actions likely to be achieved in 1-3 years, and long term goals are likely accomplished in 3-10 years, or beyond.  

Risk Management:

What risk management practices do you have in place? Think about your business contingency plan, insurance coverage, regulatory requirements, and your market and production diversification.   

Marketing

For some people, this can be the most fun or the most challenging part of creating your small farm business plan. Before thinking about your marketing tactics, think about the data you need to make informed business decisions. 

Market Share:

Researching your target market is key to understanding what opportunities are available in the marketplace. Is there current market share to gain? How will you remain competitive as a farm business? Who are your biggest competitors in the marketplace? Do you anticipate any obstacles?  

Income:

How will your farm business generate farm income? Think about how your product will be sold and priced? What is your projected or estimated income? How are you going to gain commitments and contracts to sell your products? 

Marketing:

What marketing strategy will your business use to reach your business goals? As a small business, will you utilize tools like social media, email marketing, and/or ecommerce to maximize your marketing efforts to connect with your target audience? Check out our blog on how to create a marketing plan for your farm and download a free template!

Financials

Arguably, the most important part of your agricultural business plan is how you will finance your operation. In this section, make sure to take time to complete your balance sheet. The balance sheet will identify your cash-basis income trend, breakeven analysis, and sensitivity analysis. This statement is a summary of what you own vs. what you owe. 

The income and expenses statement shows your business’ profit and loss over a period of time, determined by taking all the revenue and subtracting all expenses. This will show the profitability of your operation. 

Business Advisors

Business advisors are a group of professionals who serve as subject matter experts to enhance productivity, business, and on-farm profitability, while offering technical insight for your farm operations. Surrounding yourself with people who know how to support your farming venture will help to support and find your long-term business success. You will want to organize your team that might consist of an attorney, accountant, lender, insurance provider, and consultants in the last section of the business plan.  Did you know Farm Credit offers services for Accounting, Records, Payroll and Taxes, Appraisal, Business Consulting, Farm Succession Planning, and more? Give us a call at 888.339.3334 or view our full list of services here.

Congratulations! You’ve made it through each section of how to write your business plan! If you’re interested in more coaching on your business plan, check out the resources below or give us a call to connect with a local lender — we're happy to help. 

Additional Resources to Help You Write Your Farm Business Plan

Request your Business Plan Template and replay of our How to Write a Business Plan webinar here.

Click here to request a mentor with SCORE Small Business Resources.

At Farm Credit, we know agriculture and rural living. For over 100 years, we've been helping people like you achieve their goals of buying land, building their homes, purchasing farm equipment, and growing their agriculture businesses.

Let's talk about how to get a loan at Farm Credit, what Farm Credit loan requirements are, and what to expect through the application process.

How to Get a Loan with Farm Credit

When you're ready to make it happen, here's how to get a loan with Farm Credit:

1. Connect with a Loan Officer

Unlike other agricultural lenders, we know that your situation is different than your neighbors’. You need a personalized experience to make sure you’re making the right choice for you and your family. 

Right off the bat, we’ll connect you with a loan officer to discuss your goals. Whether it’s looking to build, buy land or grow your farm, our loan officers know all the right questions to ask to help you make the best decision for you.

2. Provide Documents (Farm Credit Loan Requirements)

Once we have a good idea of what loan is best for you, we’ll explain the Farm Credit loan requirements and begin the application process. Depending on what your goals are, you may need to provide:

• Business Plan
• Balance Sheet
• Three years of tax returns
• Bank statements
• Asset verifications like stocks, mutual funds, retirement account, etc.
• Pay stubs or YTD profit and loss statement
• Copy of your driver’s license

Your loan officer will review the complete list of items loan requirements with you, but it never hurts to start compiling them now!

WHAT HAPPENS AFTER I SUBMIT MY DOCUMENTS FOR A LOAN?

After we receive the paperwork required to evaluate your financial position, we will get started on the analysis. Your loan officer will work with our team to review your credit and financial position to develop a custom Farm Credit loan package that best fits your needs.

3. Receive Decision

Once you’ve been approved for a Farm Credit loan, you’ll finalize your loan terms and conditions, choose a settlement attorney, and obtain the necessary insurance, if applicable. During this time, your loan officer will order your appraisal and the processor will contact your closing attorney.

If you are not approved for a Farm Credit loan, ask your loan officer what you can do to improve your application in the future - they're here to help you!

4. Receive Loan Closing Information

Once you're comfortable with all terms and conditions, you’ll work with your loan officer to schedule the time, date and location for your loan closing. They’ll also let you know what you need to bring with you to settlement. Ask your loan officer about DocuSign so you can sign your documents on the go from your truck, tractor or anywhere you have internet access!

5. Close Your Loan

Hooray! You made it to closing – now what? Once you sign your Farm Credit loan paperwork, here are some tips to keep the “after” part easy:

• Keep in touch with you Farm Credit team – they’re here to help you!
• Keep insurance and taxes paid, and property in good repair.
• Set a reminder to send updated financial statements and tax returns each year.
• Make your scheduled payment (Ask us about Digital Banking and other auto-payment programs).
• See what other services we can help you with including Accounting, Records, Payroll & Taxes; Crop Insurance; Farm Succession Planning; and more!

The loan application process can seem tedious at times, but once you’re sitting on your new front porch or running the numbers to see how your operation has grown, you’ll realize that the journey was worth it.

And the best part? You don’t have to do it alone.

Contact us to connect with a loan officer and let us know how we can help you make your dreams come true.

*This article was originally published on 1/3/2021 and updated as of 7/6/2023.

The process of buying land and building a house can be confusing, especially if you’ve never done it before! We'll teach you the difference between land loans vs. mortgages, and we'll introduce you to the financing options available for buying land to build a house. If this is your first time purchasing land to build a home, make sure to check out our article about things you need to know before buying land to build a house.

Is a Land Loan the Same as a Mortgage for a House?

There are different ways to finance the property and the construction of your home, and your lender will be able to help you choose what fits best for your financial situation. But first, it's important to understand that a land loan is not the same as a home loan. While there are some similarities between the two, there are also some important differences.

Differences and Similarities Between Land Loans and Home Loans

Let's first start with the similarities between land loans and home mortgage loans.

BOTH LAND LOANS AND HOME LOANS:

• Require a mortgage to be placed on the property.

• Offer fixed interest rates.

• Require an appraisal and a title company or attorney for settlement, depending on the state.

• Have a similar purchase process in terms of either working with a realtor to find land and with the seller to negotiate price and sign a sales contract.

DIFFERENCES BETWEEN LAND AND HOME MORTGAGES:

• Lenders require a larger down payment for land loans as opposed to traditional home mortgage loans. With home mortgages, downpayment requirements can vary based on the type of home loans. But, for a land loan, the down payment is typically a non-negotiable 20%.

• Interest rates for land loans are typically higher than interest rates for home loans because land loans have a higher default rate.

• The maximum length of a land loan is typically shorter than the maximum length of a home loan. For land loans, if there's no home on the land the loan term can extend to up to 20 years, depending on the loan amount. While home mortgages can go up to 30 years.

• With land loans there's additional costs involved with preparing the land for building including site prep and percolation test.

Frequently Asked Questions About Land Loans

Now that we know the difference between home loans and loans for land purchase, let's dive into some frequently asked questions around land mortgages.

What are the typical down payment and loan terms for land loans?

The required down payment for land loans is usually 20% of the purchase price of the land. Conventional financing is more flexible and can require as little as 5% down.

Are land loans higher risk than home loans?

Yes. Land loans are a higher risk for the financial institution because there is typically no existing structure or home on the property. That's why loan terms are shorter and down payments are higher. When someone purchases land, they often already have an existing mortgage or rent payment. If financial difficulties were to occur, that person would be more likely to default on a land loan with no structure instead of their mortgage or rent – in fact, this is why most lenders don’t finance bare land!

When I go to build my house on my land, can I use any of the current equity I've accrued towards the down payment and closing costs?

Yes!, If you got a land loan and didn’t build your house right away, you are able to use the equity in the land towards down payment and closing costs when going to build your home. 

Once you apply for the construction loan, a new appraisal will be done that will assess a value on the land and the proposed new home based on your construction contract and plans. Farm Credit can lend up to 95%, depending on the program, of that newly assigned value. Since land purchases require 20% down, it is possible to not need any additional funds when going to build since the closing costs can be financed if there is enough equity.

Is it cheaper to buy land and build a home than to purchase a pre-existing home?

Sometimes. When building on land that is already owned, it can be less expensive than purchasing a pre-existing home. However, this will depend heavily on factors such as your local market, the cost of materials at the time, and the type of home you are building.  

Typically, when purchasing a home that is already built there will be less out of pocket expenses since you can purchase an existing home for 5% down, plus closing costs with only one settlement. When purchasing land and then building a home, there are usually two settlements, one for the land and one for the construction along with other expenses such as preparing the land for construction. 

If I'm buying land now, is it cheaper to also build my house now?

Sometimes. Typically, buying land now and building right away will be cheaper than waiting to build.  However, it depends on many factors like current interest rates, the cost of construction materials, and the cost of living expenses incurred while the house is being built. Also keep in mind that construction can take up to 12 months for the new home to be completed and be ready to move in. You will need to plan for where you will be living during the construction phase, especially if you plan on selling your current home to help fund the construction of your new dream home, since this will need to be done before the construction settlement.

Many builders advise that you consider the state of the economy when deciding when to build on your land. For instance, look at interest rate trends and construction material cost trends - like the price of wood. If there are high interest rates, which can be lowered with a refinance, any savings might be negated by a rising cost in construction materials. Our blog Can I Buy Land Now and Build Later? goes into a little more detail on this topic. 

Can I buy land and build a home with one loan?

Yes, you can buy land and build a home with one loan. This type of loan is typically referred to as a Construction to Permanent Loan (C2P).

To apply for a C2P loan with land purchase, you will need a completed construction contract, blueprints, and specifications before making your offer on the land purchase. By doing so, both the land purchase loan and the construction loan can occur at the same settlement. We understand there is a lot that goes into finalizing the construction documents with the builder, which is why most of the time people typically purchase the land and then do a construction loan. This helps to secure the lot and allows time to finalize details with the builder with much less of a time constraint. If you are in a situation where you have the builder documents ready to go and are just waiting for the right lot to come along, then C2P with land purchase may be a good fit for you!

What are my options with Horizon Farm Credit when building?

Here at Horizon Farm Credit, we have experts available to help find the best financing solution when building your dream home. We can help finance all types of homes such as stick built, modular, doublewide manufactured, and even Barndominiums, which are pole buildings that include living space and are becoming quite popular in rural areas. 

We can help pre-qualify you before you even talk to a builder so you know what monthly payment and amount out of pocket you can expect when selecting your home. We will be with you every step of the way through finalizing the contract and plans with the builder to ensure all costs are accounted for, to moving in and making your dream a reality.  We are happy to answer any questions you may have so please do not hesitate to contact your local office or loan officer!

As a young, or new farmer, writing your business plan is typically a solid starting point to developing your farm's financial future. But, how do you understand the financial portion of your agribusiness? Let’s us help guide you through three steps that can help you better comprehend your farm financials.

Jump to: 

1. Financial Statements
   • Income Statement
   • Cash Flow Statements
   • Balance Sheet
2. Ratios and Benchmarks
   • Current
   • Working Capital
   • Liquidity
   • Equity
   • Profitability
   • Efficiency
3. Request your FREE Farm Financials Spreadsheet!

WHY DO I NEED TO UNDERSTAND MY FARM FINANCES?

Before you look into each of the statements and ratios, it's important to know why keeping track of your farm finances is important - it's not just an item to check off the list. Understanding farm financials are important to make sure you're operation is efficient and profitable, remaining compliant with legal requirements for taxes and payroll purposes, and to understand your financial position for when you need a loan to grow. 

Understanding Farm Financial Statements

INCOME STATEMENTS

A farm income statement is one of three important financial statements used for reporting a farms financial performance over a specific period of time. This statement focuses on four key items – revenue, expenses, gains and losses.

Net Farm Income = Income - Expenses

CASH FLOW STATEMENTS

A cash flow statement is a listing of cash (or cash equivalents) entering and leaving an operation that occurred during the past accounting period. A cash flow budget is a projection of future flows that would include expected payments or payments to accounts receivable. Think of this as a “check book registry”.

BALANCE SHEET

As lenders, we commonly utilize a farmer’s balance sheet for a financial reference. A balance sheet is a “snapshot” of a farmer’s financial position and it outlines an individual’s net worth. Net worth reflects the value or dollar amount of the reported assets you actually own, versus how much is currently financed.  Balance sheets from December 31 are the most useful and coincide with taxes. Even if you aren’t requesting a loan, it’s a good idea to gauge your growth and financial position at a given point throughout the year and to keep this timing consistent from year to year. This should help you to determine both your personal and business financial position.

Want to see it explained a little easier? Check out this quick video!

Assets are what you own. Some examples of assets are cash, real estate, equipment, etc.

Liabilities are what you owe. Some examples of liabilities are credit card debt, mortgages, equipment, auto loans, etc.

Farm Financial Ratios & Benchmarks

Financial ratios will tell you how one particular aspect of your operation relates to another in the form of assets and liabilities. You can use these ratios to compare yourself to industry specific benchmarks to measure your performance against the competition and rest of the industry’s producers.

Your current assets are typically balance sheet items that are reasonably expected to be converted to cash within one year in the normal course of your farm business. These are typically feed, seed, crops held for resale, market livestock and accounts receivable.

Your current liabilities are farm debts that are due within one year. These are expenses such as cash rent, credit card debt, and accounts payable for seed, feed or fertilizer.

WHAT IS YOUR CURRENT RATIO?

Current Ratio = Total Current Assets/Total Current Liabilities

Ideally as an owner/operator you aim to have a minimum of a 1:1 ratio. This means that you have enough cash available to pay all of your expenses and bills for the reported period or year. This ratio allows you to see that you have $X available to service every $1 of debt. 

What are ways to improve your Current Ratio? Selling capital assets that are not generating return to the business. This will allow you to use the cash to reduce current liabilities. Also, you can use any extra cash income generated by the farm to pay accounts payable or to reduce your farm operating line of credit rather than making additional principal payments on term loans.  If your farm operating loan is close to the maximum principal level or if your farm has carryover operating debt from the previous year, consider refinancing some of the farm operating debt with longer term financing.

WHAT IS WORKING CAPITAL?

Working Capital = Total Current Assets –Total Current Liabilities

Working capital is the money available to fund a business’s day-to-day operations. Positive working capital indicates the business can pay off its short-term liabilities almost immediately. For your operation, this might look like $/acre or $/cow.

LIQUIDITY

What do financial benchmarks mean for your farming operation? Essentially the figure you are coming up with tells you how much of the year’s expenses you can pay with the liquid funds available for daily operations. Keep in mind the first ratio assumes that all current liabilities (debt payments due in 12 month) are maintained and focuses primarily on the funds available for day to day operations and business expenses. 

Both the current ratio and working capital ratio are measures of liquidity. Liquidity is the ability of the business to meet financial obligations as they come due. It is defined as the availability of cash or near-cash assets to cover short-term obligations without disrupting normal business operations. A good ratio to calculate to reflect liquidity is working capital as a percentage of annual expenses.

Working Capital as a percentage of Annual Expenses = (Current Assets – Current Liabilities)/ Farm Expense.

• <20% - evaluate and make changes*
• 20%-50% - monitor the situation* The reason you would want to monitor your financials closely if you fall within this range is because this ratio tells you that you will only be able to maintain 20-50% of your annual farm expenses with the funds that you currently have available for daily operations. 
• >50% - strong financial position* Depending on your industry and personal risk tolerance it can be assumed that if you fall above 50% for this ratio you are in a comfortable position because you are able to maintain over half of your annual farm expenses with the funds that you currently have available for daily operations.

*Depending on what industry you are involved with these benchmarks could change. If you calculate a 20%-50% 

EQUITY

Why is equity important to your farm operation and how can you use it to drive results? Your equity position depicts the relationship between your assets (what you own) and your financial obligation (what you owe). The equity ratio helps you to evaluate the percentage you own of the assets reported on your balance sheet, versus how much of it may be financed by a lender. The basic ratio to determine percent equity is:

% Equity = Total Farm Equity / Total Farm Assets

• <35% - evaluate and make changes*
• 35%-60% - monitor the situation*
• >60% - strong financial position*

*Depending on what industry you are involved with these benchmarks could change.

PROFITABILITY

This ratio is important because it can help a business owner decide whether or not their assets are making money. Do you currently own assets, equipment, vehicles, or livestock that aren’t making you any money? If so, what you own these assets and is there an opportunity to put your business in a better position by using those assets in another way to potentially liquidating them? The Return on Assets (ROA) shows the percentage of how profitable a farm’s assets are in generating revenue. The ratio to determine ROA is:

ROA = (Net Income + Interest) / Total Farm Assets

• <3% - evaluate and make changes*
• 3%-6% - monitor the situation*
• >6% - strong financial position*

*Depending on what industry you are involved with these benchmarks could change.

EFFICIENCY

To measure efficiency, the Operating Expense Ratio (OER) can be used to show the relationship between operating expenses and gross revenue. This is calculated with the following formula:

OER = Farm Expenses / Farm Receipts

• <3% - evaluate and make changes*
• 3%-6% - monitor the situation*
• >6% - strong financial position*

*Depending on what industry you are involved with these benchmarks could change.

Know Your Numbers

While farming is a risky business, identifying production and financial projections are an important management skill. Farmers do have resources to help determine these values. Think about it this way, what amounts should I invest in acreage to be farmed or livestock to be purchased, raised or sold? Or what amounts will I receive for the sale of farm products? Remember these are projections, do your best to make them realistic. We encourage meeting with your loan officer to help walk you through this conversation and to help interpret what the ratios and benchmarks mean to your individual operation.

As an owner-operator it is important to keep accurate financial and production records for your operation -this will enable you to calculate these projections for the future. If you need some help understanding yours and taking the next step - give us a call. We're here to help!

How are interest rates determined?

If you're currently lender shopping (financial best practice!) you're likely to be curious about the determinants of your interest rate - especially because it varies from place to place.

Of course, there’s always more to consider about a lender than the interest rate alone, but it's one of the most important factors when selecting an institution. There are around 26 different factors that determine interest rate quotes.

Top 12 Factors that Determine Interest Rate

1. Credit Score
   The higher your credit score, the lower the rate.
    
2. Credit History
   The less credit history you have, the less knowledge a lender has of your repayment ability, possibly making you slightly more risky. The better the payment history, the better the rate.
    
3. Employment Type and Income
   Self-employed, hourly employed, bonus-based pay – these all affect the risk factors of whether you’ll be able to pay back the loan.
    
4. Loan Size
   How much money are you asking for? Often if you are requesting an amount under a certain level (i.e.$100,000), there may be a slight increase in rate.
    
5. Loan-to-Value (LTV)
   What percentage is your loan amount to the value of the property? Typically, the lower the percent, the lower the rate.
    
6. Loan Type
   Fixed, variable, adjustable, balloon – these all have varying rates because of the variation of risks. Depending on the situation, your initial interest rate may be lower with an adjustable rate than with a fixed rate but you run the risk of the rate increasing significantly later on.
    
7. Length of Term
   The shorter the term on your loan, the quicker you’ll be paying down the debt; possibly resulting in a better rate. It’s important to note that your payments will most likely be higher, so you’ll want to make sure you can afford it.
    
8. Payment Frequency
   Because of the agriculture industry’s unique nature, if you elect for a payment plan that allows for an annual or semiannual payment rather than a monthly one, you can expect a higher rate.
    
9. Property Type
   A residential housing loan will have a lower interest rate than a commercial farm on 50 acres because of the increased risk that comes with a farm loan. Purchasing a farm or land loan is different because there aren’t as many properties for value comparison, buyers or people that can afford to.
    
10. Co-borrowers
    Will there be other people on the loan, and if so, what does their credit look like? All parties involved in the loan will be used in determining the rate.
     
11. Debt Ratio
    How much money is made monthly versus the cost of monthly bills. The typical ratio that lenders looks at is 42%.
     
12. Documentation Available
    Are you able to produce all documentation (bank statements, taxes, retirement accounts, etc.) to show your assets? This will help ease the risk factors for a lender and help lower the rate.

14 OTHER FACTORS THAT COULD AFFECT YOUR INTEREST RATE

In addition to the 12 factors above, there are 14 other determinants of interest rates you should be aware of:

1. Escrow Preference
   Some lenders require escrows for residential or consumer loans. This means specific money put aside to pay for things like taxes, insurance, etc. If you choose not to escrow, your rate could be higher due to higher risk.
    
2. Closing Date
   Depending on the market temperament, it can be important to lock in on a rate that is as close to your closing date as possible. The longer the rate lock period, the higher the rate will be.
    
3. Occupancy Type
   Typically, rental or investment properties have higher interest rates.
    
4. Residency
   Rates will be lower if you plan to live in the house full-time versus using it as a second home.
    
5. Available Assets
   What additional assets do you have as possible collateral? The more down payment you have, usually the lower the rate.
    
6. Asset Seasoning
   How long have you had your assets? There may be restrictions for assets owned under a certain time frame that could affect the rate.
    
7. Housing Ratio
   What does the ratio from above look like when you add in the cost of the mortgage? Usually a good housing ratio is 28%.
    
8. Improvements Needed
   This will affect the value of the property. Remember that the lower the percentage of the loan amount to the value of the property, typically the better the rate.
    
9. Employment History
   This also affects the risk to the lender. If you show a consistent history of employment, the better chance for a lower rate.
    
10. Relocation
    Are you being temporarily or permanently relocated by an employer? That will determine if the house is considered a secondary (higher rate) or primary residence (lower rate).
     
11. Seller Contributions
    If the seller is able to contribute money towards closing costs, that will increase the amount you have available for a down payment.
     
12. Gifts
    Again, lowering the amount of loan you’ll need with gifts from family members will help to lower the interest rate.
     
13. Cash-out
    If you refinance and want to walk away from closing with money in your pocket, you may be increasing the percentage of loan to property value.
     
14. Combined Loan-to-Value (CLTV)
    This ratio includes not only the current loan you are wanting, but any additional loans on the property, such as a home equity.

You don’t have to remember all of these interest rate determinants, but if your lender is quoting you a rate without asking some of these questions, be sure to ask them what criteria they are using to factor your rate.

How to Compare Loans side by side

THERE’S MORE TO A LOAN THAN JUST THE INTEREST RATE.

Yes, the interest rate is important and is probably one of the first questions you want to ask, however, don’t forget to find out the following:

• Can you reset the loan at a lower rate if interest rates come down? How much will it cost you?
• Is there a prepayment penalty if you want to pay ahead or pay the loan in full?
• Does the lender give great service?
• Do they answer the phone or return calls promptly?
• Can the lender get the loan completed in a timely manner?

A few key things you should compare may include (but may not be limited to) some or all of the following:

• Application fees
• Appraisal costs
• Settlement costs
• Attorney fees
• Title insurance costs
• Loan origination fees
• Servicing fees

If you have any questions about how this works with Farm Credit or what your interest rate could be, give us a call to speak directly with a Loan Officer or fill out the form on our contact us page.

When greenhouse growing first began in the 13th century, it served as a way to appease royalty’s nutritional demands, house foreign tropical plants for study, and grow medicinal plants. Commonly found among wealthy citizens, eventually the science of greenhouse growing expanded to universities where research could be continued and eventually published.

Today, with the surge of new and innovative technology within the agriculture industry, operating a greenhouse isn’t limited to just the wealthy and universities, but to anyone with a desire to start their own business or even just to incorporate new methods of sustainable living into their everyday lives.

Advantages of Greenhouse Growing

Before you decide that greenhouse growing is the next step for your lifestyle, careful planning and research must be taken into consideration to effectively weigh the advantages and disadvantages to greenhouse growing. We’ll start with the benefits of a greenhouse.

EXTENDS YOUR GROWING SEASON.

One of the primary advantages of greenhouse farming is that it extends the growing season. Any gardener or farmer knows planting crops outside depends wholly on weather patterns and conditions that must be suitable for seeds to take root and thrive. With a greenhouse, many different techniques can be used to keep the temperatures stable, causing less stress to the plants and promoting strong growth much earlier in the year. Some popular techniques involve creating thermal solar mass by using natural materials that readily absorb, store and release thermal heat, and using man-made heaters and heating fans.  

EXPANDS THE VARIETY AMONG YOUR PRODUCE.

Another great benefit of growing inside a greenhouse is the variety. As vegetables come in and out of season, prices fluctuate accordingly based on availability, demand, and production methods among many others. Investing in a greenhouse gives your operation the opportunity to provide a variety of different produce on the “off season” creating greater availability for your customers in times of low supply and also having the ability to grow new produce or flowers that do not typically thrive in your climate. Not having to worry about external elements gives you almost complete control to provide the best growing environment for your crops.  

MINIMIZES EXTERNAL THREATS TO YOUR CROPS.

There’s nothing worse than coming out to your newly sprouted seedlings to find that a furry little bunny made a tasty salad out of the dainty leaves that once occupied your defenseless new stems. And just like that, the little bunny doesn’t seem so cute anymore. While rabbits aren’t the worst of your worries when it comes to your crops, in your greenhouse, you control what comes in and goes out. Besides providing shelter from threatening weather, this control allows you to minimize the introduction and spreading of diseases, pesky varmints waiting to snatch up your delicious greenery and to control temperatures to keep your plants from getting too chilly.

Disadvantages to Greenhouse Growing

While the benefits of are significant, there are also some disadvantages to greenhouse growing that you should be aware of.

HIGH UPFRONT AND OPERATING EXPENSES.

In order to utilize a greenhouse to the best of its ability, you’ll need to invest in a kit or supplies that will have a good lifespan and proper characteristics for the plants you want to grow. For example, cheaper film plastics may provide sufficient conditions to retain heat, but more expensive glass windows will last longer and may help ventilate the greenhouse if able to be opened.

With maximum climate control, comes the potential for a very high operating cost. If you choose to heat your greenhouse via electronic heaters or by way of gas, you’ll see a serious increase in your monthly bills.

PESKY PESTS AND LACK OF POLLINATION.

While having a greenhouse can help you control most of what your plants come in contact with, one or two plants carrying pests like whiteflies or other diseases can quickly spread to the rest of your plants, sabotaging your entire crop. Careful precautions must be taken to eliminate any pests or diseases to make sure your next crop won’t be affected.

Implementing greenhouse growing can be an excellent investment when carefully planned, built, and maintained, creating the potential for an increase in revenue or a means of saving on your monthly grocery bill. Make sure to research all of your options before committing to one style or method.

Is Greenhouse Growing a Part of Your Plan?

As always, Horizon Farm Credit is dedicated to providing agricultural expertise and a positive customer experience, so if you’re wondering if a greenhouse will fit into your business plan or what your options are on financing, get in touch.

A Message from the President, Tom Truitt: 

There’s a lot about my job I enjoy, but one thing I never tire of is hearing the unique stories of our members. Some span decades – centuries even, in some cases – while others only a year or two. But regardless of whether I’m talking to a customer in their 50s or one in their 20s, you start to hear common themes among them – a dream, determination, and a passion for what they do.

Farm Credit’s mission is to help all of agriculture, and we take that seriously. As the average age of today’s farmer continues to creep closer to 60, it’s crucial we not only support those who have made the industry what it is today, but to be there for those just entering the field with the hope of progressing it for future generations. The four customers featured in this issue of the Leader are stellar examples of this up and coming cohort of young producers.

This issue also announces the dates of our 2020 customer events (page 12) and the Farm Credit Foundation for Agricultural Advancement’s new Community Education Program, aimed at providing financial support to organizations and programs educating our communities about agriculture (page 13). And, for all you budding entrepreneurs - don’t miss our article on page 14 on how to write a farm business plan, complete with a link to where you can download a template to help make the process even easier. We also have a code for you to get 50% off a QuickBooks subscription to help get you started on the right foot (back cover).

Wishing you all a happy and healthy spring,

Tom Truitt, President and CEO of MidAtlantic Farm Credit

The New Year brings with it many new opportunities and changes for most businesses. While we are all hopeful for a better year, there are also things we can do to ensure 2021 is successful.

Protecting your operation with crop insurance is one way to mitigate risk this year by providing a safety net to your bottom line. Check out these great new Crop Insurance Policy options for 2021:

Enhanced Coverage Option (ECO)

This option is similar to the Supplemental Coverage Option (SCO), but can provide an additional band of coverage up to 95% for a portion of your underlying crop insurance policy deductible. It must be purchased as an endorsement to the Yield Protection, Revenue Protection, Revenue Protection with the Harvest Price Exclusion, Actual Production History, or Yield Based Dollar Amount of Insurance policy.

Quality Loss Option (QL)

This option allows substitution of a post-quality adjusted (QA) yield for a pre-QA yield in an Actual Production History (APH) database in circumstances where quality loss occurs. The QL will be offered at an actuarially sound premium rate. The Risk Management Agency implemented the QL in response to the 2018 Farm Bill to carry out research and development that establishes an alternative method for adjusting quality losses that will not impact your APH.

UPDATED – Hurricane Insurance Protection Wind Index (HIP-WI)

This option provides additional coverage in the event of hurricane-force winds in your covered county or an adjacent county. The objective of this endorsement is to alleviate ad-hoc disaster assistance and speed up the payment time frame in hurricane wind disaster situations.

The endorsement is an addition to your MPCI or CAT policy and will cover the deductible portion up to 95% in coastal area counties designated in the actuarials. The endorsement covers wind damage only, not flooding or excess precipitation. You can choose the percentage of payment you would want to receive in a loss anywhere from 1% to 100%. If your county is deemed to have had a loss from a named hurricane (does not include tropical storm damage), claim payment will be automatic. With this product being new and different from traditional MPCI crop insurance, contact your agent soon to discuss how HIP-WI can fit into your operation’s risk management plan. If you added this endorsement for 2020, it will remain on your policy unless you request that it be removed.

For more information regarding any of these options, please contact your crop insurance agent prior to the March 15th sales deadline. Visit farmcreditcropinsurance.com to learn more about our crop insurance services at Farm Credit.

We are proud to partner with Rain and Hail LLC, QBE NAU, and Rural Community Insurance Services (RCIS).