For most people, from credit cards to home loans to farm operating loans, the most important factor is determining if a loan is the right interest rate.
Make no mistake—interest rates are important. After all, even decreasing your interest rate by a single percentage point can significantly affect the loan payment, especially if the loan is a considerable amount.
But, interest rate is not the only important number to consider when it comes to farm operating loans.
Don’t Get Distracted by a Lower Interest Rate for Farm Operating Capital
Most farm operating loans are based on hard assets rather than crop production, making it even more difficult for farmers who rent ground to secure credit. Farm operating loans from community banks or other agricultural lenders are often seen as better or more affordable because they have a lower interest rate.
However, crop production-based loans, like those offered by FarmOp Capital, are often incorrectly associated with an overall higher price tag if they have a higher interest rate. But if you dig into a farm’s overall finances, it’s easy to see that determining the true and total cost of overall farm operating capital is more complex. Instead, it requires a closer look at loan terms and structure, such as the overall size of the loan, loan timing, loan amount and interest rates from third-party creditors, as well as when farmers sell their reserved crops.
Does Your Farm Operating Loan Cover All of Your Annual Cash Flow Needs?
Let’s start with the overall ‘ask.’ Generally, farm operating loans cover only a portion of the amount most farmers need. The reason is simple: Community banks or other agricultural lenders simply don’t have the desire or capacity to finance the size of loans larger farms require, leaving some of the country’s most productive farms underbanked and stuck in a lending gap.
It also means that farmers need to supplement their operating loans with other loans. If the primary operating loan only covers 60% of a farm’s annual capital needs, third-party credit is often needed to fill the gaps. What started as a relatively low-interest rate on a farm operating loan has now expanded with third-party creditor’s additional, and often higher, interest rates.
On the flip side, production-based loans allow additional flexibility for farmers who primarily rent ground or have not accumulated hard assets. They also allow farmers to receive a larger loan amount—oftentimes up to 100% of their annual cash flow need.
When You Borrow Farm Operating Capital Matters
Adding insult to injury, the timing of many farm operating loans isn’t ideal. Allowing only 12 months from receiving an operating loan to the loan payoff doesn’t cover the entire crop production cycle—or allow farmers to make financial decisions that could provide them with a bigger profit margin. That’s why many farmers face not having enough cash for their business when they need it.
For example, FarmOp Capital loans offer a fixed interest rate—certainly a plus with financial experts now predicting a bump in interest rates to come—and the loan timing can stretch anywhere from 18 to 24 months. These extended terms give farmers a wider window of opportunity to plan for the crop year, take advantage of early input order discounts and sell their crop when it’s most profitable.
Flexible Farm Operating Loan Terms Puts Purchasing Power in Your Hands
Extended loan terms give farmers the flexibility to make game-day decisions, which can help them scale their operations, including reserving the capital necessary to make additional farm ground rental agreements or land purchases.
And, with loans available as early as late summer of the preceding crop year, farmers can get their funds early to pay cash for inputs like chemicals and seed, which could mean additional savings—plus shaving off any third-party credit that could add to their overall interest rate.
Finally, longer loan terms mean farmers can store their crop longer, selling later in the year or early the following year, when commodity prices are higher.
Borrow Farm Operating Capital Based on Your Future Crop, Not Your Existing Assets
In the end, it isn’t an apples-to-apples comparison between farm and agricultural lenders’ interest rates, especially when farmers consider the advantages of a crop-production-based operating loan. Those loans are not based on how much the farmer owns, but their ability to grow a crop and squeeze the most profit out of already-thin profit margins. Most importantly, young farmers focused on growing their farm business can be in the driver’s seat when it comes to making decisions that could ultimately change the course of their business for years to come.
Operating loans are an integral part of today’s farming operations—necessary to scale operations, bring additional people into the business, or even hand the farm down to the next generation. It’s time to make farm operating loans work for farmers, not the other way around.
See how a FarmOp Capital operating loan can help you achieve your goals. Click here to receive a personalized Quick Quote from FarmOp Capital within one business day.