Land Loans, Equity Crowdfunding, and Beyond: Know Your Farm Financing Options
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This article was originally published on ASFMRA.org on July 1, 2021.
Farmers know it well: in order to make money, you have to spend money. When you’re looking to buy a farm, expand your farming business, or improve a piece of farmland, the first thing you need is some capital to make it happen.
There are myriad options for financing land purchases or farm business expansion, including a few that are less conventional but just as effective. This article reviews some of the most common routes to accessing farm capital and introduces some debt-free alternatives that you may not be aware of yet—but are helping farmers across the U.S. accomplish their business goals right now.
Financing Farm Expansion with Debt
Broadly speaking, you have two options for accessing the capital you need for your farming venture: debt or equity.
Debt is the most common way of financing growth. People seeking credit for agricultural enterprises are looking at two primary pathways:
Private Land Loans
These are loans taken out from traditional private lenders like banks and credit unions. They can function similarly to home mortgages, but may come with improvement stipulations, higher down payments requirements, shorter repayment timeframes, or higher interest rates.
The average bank won’t necessarily offer loan terms that work for farm operators, and many major banks and credit unions don’t finance land at all.
When seeking a private loan for farmland, going through an institution that specializes in agricultural finance is often the best bet. These entities will offer financial products tailored specifically to agricultural or rural endeavors like farming, ranching, and rural homebuilding.
Government Land Loans
There are a few long standing credit programs administered by the U.S. government and designed to assist with agricultural and rural endeavors.
The USDA offers many options for ag financing through the Farm Service Agency (FSA). These may be direct loans or be funneled through associated lenders like the Farm Credit Administration. Farm Credit is a nationwide network of private institutions that administer government lending services, with many states having their own offices. Finally, USDA Rural Development loans are targeted more towards rural homebuilding and infrastructure.
The most likely avenue for growing farmers, FSA credit can come in a broad variety, including loans for land ownership and farm operation, microloans, and emergency loans for specific situations. There are also programs targeted to farmers just starting out or starting from a disadvantaged situation, as well as ones designed to support sellers helping out a new or expanding farmer.
In order to secure a government loan, you will need to present a cohesive business plan for how your operation will work. One limitation is that these credit programs typically have lower ceilings; for example, FSA land ownership loans max out at $600,000. Other constraints that can accompany debt include credit limits, collateral requirements, and general risk, along with application periods and other stipulations that could hamper the process.
Financing Farm Expansion with Equity
The alternative to debt financing is equity. Of course, if you’ve got the cash, you can buy land outright or finance improvements on your own.
But for farmers who don’t have that kind of capital on hand, crowdfunding opens up a number of alternative avenues.
If you’re unfamiliar with crowdfunding, it’s basically what it sounds like: funding a project by pooling relatively small amounts of capital from a relatively large crowd. Technically, it would be crowdfunding if everyone in your family got together to buy a piece of land. Online crowdfunding platforms formalize the process by creating a public interface through which entrepreneurs can reach a lot of funders at once.
Equity crowdfunding rewards contributors with shares in the venture. The JOBS Act of 2012 cleared the way for businesses to raise capital this way, and it’s been a growing phenomenon amongst investors, helping companies raise tens of billions of dollars.
It’s being done for farmland and agricultural ventures too. Taking advantage of long-term appreciation, investors can pool their money to buy tracts of land. That land is then leased to the farmer, who works it independently, often along with other acres within their operation.
Sponsored deals are similar to equity crowdfunding projects, but the operator retains more autonomy and responsibility.
The sponsor is a farmer or farming business that will source and arrange their own deal, whether it be land acquisition, permanent crop planting, or something else. They’ll then utilize investors' money for that deal via a private offering.
Sponsored offerings may use a platform such as AcreTrader to facilitate their fundraising efforts and will pay a technology fee for access to the platform. Sponsors will often put up some of their own capital as part of the fundraise.
This means that investors are buying shares in a business rather than simply a tract of land. Agricultural endeavors most suited to these types of projects are permanent crops (like fruit or nut trees) or organic ventures, which require larger amounts of upfront capital but show higher cash yields over time.
Sometimes a farmer will have a lot of equity tied up in land they already own. A sale-leaseback—in which a landowner sells a tract and then rents it back from the buyer—enables the seller to access that capital while keeping those acres within their operation.
Leaseback agreements are generally longer-term contracts, allowing farmers to lock in rent as a tax-deductible expense. Right of first offer on any resale of the land can also be included in the terms. Farm operators often see flexibility as an appealing element of sale-leasebacks.
Grow Your Operation with AcreTrader
AcreTrader facilitates all these arrangements. A crowdinvesting platform specializing in farmland and farming operations, they help farmers scale by providing access to capital quickly, flexibly, and transparently.
AcreTrader’s diverse team knows as much about farming as they do about finance, and they conduct business on a personal basis, helping operators achieve their individual goals. If you are a farmer looking to grow, or if you work with farmers as a lender, manager, appraiser or other capacity, get in touch today.
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