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Loans to Start a Farm: Top Farm Financing Options

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If you’re looking for business loans to start a farm, we don’t need to tell you that farming is a tough business. Not only is it capital intensive, but markets for certain products swing often, which can be tough for all of the hard work you put in. Because farming is nothing if not honest, hard work—with a lot of rewards, of course.

But back to capital. You need money to make a farm run, and run well: Things including purchasing large equipment and livestock, and upgrading your technology are all expensive and can often require farm financing to make ends meet. Here, we’ll go through a few of the top options for farm business loans, so you can make an informed decision on how to best finance your farm.

Regardless of whether you’re in poultry farming, dairy farming, or even vegan farming (yes, really!), there’s a small business loan that’s the right fit for you.

Getting a business loan to start a farm: The unique needs of farmers

According to the USDA, farming is going strong. But it can be tough to make a strong, consistent living sometimes; statistics show that more than half of U.S. farms are deemed “very small” and only generate about $10,000 of revenue. The median income for larger farmers was at about $75,000 per household. That’s certainly nothing to sneeze at—but revenue on the lower side, as well as often unpredictable earnings due to factors often out of your control, can be scary for lenders who are looking for surefire bets.

Additionally, farming is a highly seasonal business. That doesn’t mean you don’t work around the clock, but it does mean that your revenues are likely inconsistent from season to season, depending on your business. Even if you operate a farm that yields year-round, demand is seasonal.

What lenders look for

With those things in mind, it’s important to take the farm business loan provider’s point of view to understand how they’ll see your loan application.

First and foremost, lenders are looking to work with the least risky candidates possible. Their job is to get their money back, and they do that by getting their loans repaid with interest. They don’t do their job if a client defaults on a loan, which is why they must be choosy about whom they lend to. That’s why your credit score is very important: It tells the story of your responsibility with loans, whether farm financing or just your business credit card.

Many lenders also have requirements for minimum revenue or time in business, which can be tough if you’re looking for farm financing to help you recover from a down year, or looking for a loan to start a farm. This doesn’t mean you’re out, but you should keep these requirements in mind, and know your credit score, as you start the process to apply for a business loan.

The best farm business loans for most farmers

The most important thing to remember as you’re reading through this list is that each farm financing option has a slightly different purpose. You’ll want to understand exactly how you’re hoping to use the money as well as what you can afford as you narrow down your search.

Best for incremental purchases: Business line of credit

If you’re looking to supplement your purchasing with some financing here and there, you might want to consider a business line of credit.

Think of a business line of credit like a traditional term loan mixed with a credit card advance cash. You apply for a business line of credit the same way you would a traditional loan via a lender, who has certain requirements for qualification. Then, after you gain approval, you can withdraw as much money as you’d like up to the maximum of your line of credit.

Most importantly, you only pay interest on the amount you use (unlike lump-sum loans, on which you owe full interest no matter what). In addition, many lines of credit are known as “revolving,” which means they are re-upped for reuse once you repay them.

These loans are excellent for emergencies, like replacing the roof or redoing your irrigation, but also for seizing opportunities, like if you had a one-time chance to buy more land and needed to come up with quick money.

Best for equipment purchases: Equipment financing

To get your farm up and running with the right supplies, a huge capital outlay is needed (not to mention additional money to replace equipment it if anything goes down).

If you’re specifically looking to purchase fixed assets, you’ll find equipment financing extremely helpful. With this type of small business loan for farmers, you’ll supply a lender a quote for the equipment you’d like to buy (you could include tractors or rakes—doesn’t matter!), and a lender will supply you with a large portion of the cost. Then, you’ll repay your loan, which lasts over the course of the equipment’s lifetime.

In contrast to other types of business loans, equipment financing is what is known as a “self-secured loan.” This means that the asset you finance serves as a guarantee for the loan. (And, the more valuable the asset on the liquidation market, the higher the possibility that your loan interest could be lower.) For those without the perfect credit, or who want to reduce their guarantee, this built-in collateral can be especially helpful.

Best for large purchases: Term loan

Term loans are what you think of when you imagine “traditional” business loans. A major pro is that you can use them as flexible working capital, and you don’t always need a spotless credit history to qualify.

An additional general benefit of term loans is that different lenders have varying repayment structures, so if you’re interested in making monthly payments instead of weekly payments, for instance, you could find a lender willing to work with you. Loan terms will vary between less than a year (short-term loan, more expensive) and up to five years (medium-term loan, less expensive).

Many lenders look for a couple of years in business to evaluate qualified candidates, but some lenders are more flexible if you’ve had a strong, consistent period of revenue and a strong credit score, too. After receiving approval from a lender on your term loan, you receive a lump sum deposited into your business bank account.

Best loan to start a farm: 0% introductory APR credit card

The right credit card is far more powerful than most small business owners realize. If you’re just starting out, and don’t have the credit history or revenue that lenders want to see, what can be specifically helpful to you is a 0% introductory APR business credit card.

You can use this type of business credit card for any type of spending (up to your credit limit, of course) without paying interest on your balance for a predetermined period. That’s good news for farmers who need financing to start a farm because you won’t owe anything on the card for usually one or more years.

Savvy farmers often use these credit cards like interest-free loans and use them to spend on supplies or even large purchases on their credit lines, taking their time to pay off their balance. And this buying power is instantaneous upon approval. You may also choose to transfer the current balance of your business credit card to prevent your existing debt from accruing more interest.

Finding farmer-specific loans and grants

Farm government loans

The USDA and FSA have several programs to specifically help farmers. Many of these loans are tailored to develop rural communities, and some are loans to start a farm. Additionally, some programs are specifically set up to help lower-income farmers prosper. Like an SBA loan, which is backed by the US Small Business Administration, USDA loans often come with not only money but additional resources (such as farm insurance) to help agriculture-based businesses expand in many ways. Some of these sources of capital are also highly flexible, whether you’re looking to build a new barn or swap out your whole force of milking machines. They’re designed for farmers who can’t get traditional loans from a bank—which, don’t worry, a substantial number of business people can’t, either.

Grants for farmers

Similarly, if you have a lot of patience and maybe a little luck, too, you can apply for several grants specifically created for farmers and those in rural communities. In general, small business grants take quite a bit of work to apply for, but they’re the best kind of funding you can get since they’re interest-free.

The USDA’s Agricultural Marketing Service establishes many of these grants, so take a look through. Even if you need a loan fast this time around, you may still find a grant you want to apply for later on down the line.

Finding the best farm financing option

The good news is that there are quite a few different options for loans to start a farm or general small business loans for farmers. Before you kick off your search, make sure you know your finances extremely well, including your business credit score, your bank balances, and any outstanding debts. These will all go into a lender’s decision on whether you can qualify for a loan.

A final tip: Since farming is seasonal, consider applying at the end of your peak season. This may sound counterintuitive since you’ll have all of the money you need, but you’ll appear at your strongest financial position to a lender (what they want to see), and ensure you have money through the long offseason.

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Banking

How to Get a Loan to Buy a Business

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Not everyone wants to take on the challenge of building a business from the ground up. An attractive alternative can be to step into a business that’s already up and running by purchasing it from the current owner. Some advantages of buying a business may include easier financing, an established customer base and an existing cash flow.

Buying a business is different from buying a franchise. Franchises have a set business model that’s proven to work. However, when you buy an independently operated business, it’s important to show the lender that you, your previous business experience and the business you want to buy are a winning combination.

What lenders look at when you want to buy a business

Because lenders can view the performance record of an existing business, it’s typically easier to get a loan to purchase an existing business compared with startup funding. However, your personal credit history, experience and details about the acquisition business still matter.

Your personal credit and experience

Through credit reports and credit scores, lenders are able to assess how you’ve managed debt in the past and potentially gain insights into how you will handle it in the future. Your education and experience will also be evaluated.

Solid credit history: Lenders look to see if you have a history of paying your debts. Foreclosures, bankruptcies, repossessions, charge-offs and other situations where you haven’t paid off the full amount will be noted.

Business experience: Having worked in the same industry as the business you want to purchase is helpful. Related education can also be viewed as a positive.

Other businesses you’ve owned

Having a track record of operating other successful businesses can have a positive influence on lenders when it comes to buying a new operation.

Record of generating revenue: Business financial statements can help a lender document that your current or past businesses were well-managed and turned a profit.

Positive credit record: Lenders review business credit scores and reports to verify creditworthiness and to identify liens, foreclosures, bankruptcies and late payments associated with your other businesses.

The business you want to buy

Just because a business is operating doesn’t mean it’s a good investment. Lenders will ask for documentation, often provided by the current owner, to assess the health of the operation.

Value of the business: Like you, your lender will want to ensure that you’re buying a business that has value and that you’re paying a fair price.

Past-due debts: Lenders will be interested in the business’s past-due debts, which may include liens, various types of taxes, utility bills and collection accounts.

Documentation

Most lenders will let you know what they want included in the loan application package, but there are some personal documents that are typically requested, as well as ones related to the business you want to purchase.

Personal documents

The following documents are used to evaluate your personal finances, business history and plans for operating the business after its purchase:

  • Personal tax returns.

  • Personal bank statements.

  • Financial statements for any of your other businesses.

  • Letter of intent.

Business documents

Documents from the current business owner will also be evaluated. Some common ones requested by lenders include:

  • Business tax returns.

  • Profit and loss, or P&L, statements.

  • Business balance sheet.

  • Proposed bill of sale.

  • Asking price for inventory, machinery, equipment, furniture and other items included in the sale.

Where to get a loan to buy a business

Compared with finding a loan to start a business, getting funding to buy an existing business may be easier. Here are three popular funding options to check into for a business loan:

Bank loans

Banks generally offer the lowest interest rates and best terms for business loans. To qualify for this type of loan, you’ll typically need a strong credit history, plus the existing business will need to be in operation for a certain minimum of years and generate a minimum annual revenue amount set by the lender.

SBA loans

If borrowers don’t qualify for a traditional bank loan, then SBA loans, ones partially guaranteed by the Small Business Administration, may be the next option to explore. Because there is less risk to the lender, these loans can be easier to qualify for. Banks and credit unions frequently offer SBA loans in addition to traditional bank loans.

Online business loans

Another option to consider is online business loans. Online business loans may offer more flexibility when it comes to qualification, compared with bank and SBA loans. Minimum credit score requirements can be as low as 600, and in a few cases lower. Generally, interest rates are higher than what’s available with a traditional bank loan.

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Accounts Receivable Financing: Best Options, How It Works

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Accounts receivable financing, also known as invoice financing, allows businesses to borrow capital against the value of their accounts receivable — in other words, their unpaid invoices. A lender advances a portion of the business’s outstanding invoices, in the form of a loan or line of credit, and the invoices serve as collateral on the financing.

Accounts receivable, or AR, financing can be a good option if you need funding fast for situations such as covering cash flow gaps or paying for short-term expenses. Because AR financing is self-securing, it can also be a good choice if you can’t qualify for other small-business loans.

Here’s what you need to know about how accounts receivable financing works and some of the best options for small businesses.

How Much Do You Need?

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How does accounts receivable financing work?

With accounts receivable financing, a lender advances you a percentage of the value of your receivables, potentially as much as 90%. When a customer pays their invoice, you receive the remaining percentage, minus the lender’s fees.

Accounts receivable financing fees are typically charged as a flat percentage of the invoice value, and generally range from 1% to 5%. The amount you pay in fees is based on how long it takes your customer to pay their invoice.

Here’s a breakdown of how the process works:

  1. You apply for and receive financing. Say you decide to finance a $50,000 invoice with 60-day repayment terms. You apply for accounts receivable financing and the lender approves you for an advance of 80% ($40,000).

  2. You use the funds and the lender charges fees. After receiving the financing, you use it to pay for business expenses. During this time, the lender charges a 3% fee for each week it takes your customer to pay the invoice.

  3. You collect payment from your customer. Your customer pays their invoice after three weeks. You owe the lender a $4,500 fee: 3% of the total invoice amount of $50,000 ($1,500) for each week.

  4. You repay the lender. Now that your customer has paid you, you’ll keep $5,500 and repay the lender the original advance amount, plus fees, $44,500. You paid a total of $4,500 in fees, which calculates to an approximate annual percentage rate of 65.7%.

Because accounts receivable financing companies don’t charge traditional interest, it’s important to calculate your fees into an APR to understand the true cost of borrowing. APRs on accounts receivable financing can reach as high as 79%.

Accounts receivable financing vs. factoring

Accounts receivable financing is often confused with accounts receivable factoring, which is also referred to as invoice factoring. Although AR financing and factoring are similar, there are differences.

With invoice factoring, you sell your outstanding receivables to a factoring company at a discount. The factoring company pays you a percentage of the invoice’s value, then collects payment directly from your customer. When your customer pays, the factoring company gives you the rest of the money you’re owed, minus its fees.

With accounts receivable financing, on the other hand, your invoices serve as collateral on your financing. You retain control of your receivables at all times and collect repayment from your customers. After your customer has paid their invoice, you repay what you borrowed from the lender, plus the agreed-upon fees.

Invoice factoring can be a good financing option if you don’t mind giving up control of your invoices and you can trust a factoring company to professionally collect customer payments. If you’d rather maintain control of your invoices and work directly with your customers, AR financing is likely a better option.

Best accounts receivable financing options

Accounts receivable financing is usually offered by online lenders and fintech companies, many of which specialize in this type of business funding. Certain banks offer AR financing as well.

If you’re looking for a place to start your search, here are a few of the best accounts receivable financing companies to consider.

altLINE

A division of the Southern Bank Company, altLINE is a lender that specializes in AR financing. AltLINE offers both accounts receivable financing and invoice factoring, working with small businesses in a variety of industries, including startups and those that can’t qualify for traditional loans.

AltLINE offers advances of up to 90% of the value of your invoices with fees starting at 0.50%. To get a free quote from altLINE, call a representative or fill out a brief application on the lender’s website. If you apply online, a representative will contact you within 24 hours.

AltLINE’s website also contains a range of articles for small-business owners, covering AR and invoice financing, payroll funding, cash flow management and more. AltLINE is accredited by the Better Business Bureau and is rated 4.7 out of 5 stars on Trustpilot.

1st Commercial Credit

1st Commercial Credit offers accounts receivable financing in addition to other forms of asset-based lending, such as invoice factoring, equipment financing and purchase order financing. The company works with small and medium-sized businesses, including startups and businesses with bad credit.

With 1st Commercial Credit, you can finance $10,000 to $10 million in receivables with fees ranging from 0.69% to 1.59%. You can start the application process by calling a sales representative or filling out a free quote form on the company’s website. After your application is approved, it typically takes three to five business days to set up your account, then you can receive funds within 24 hours.

1st Commercial Credit is accredited by the Better Business Bureau and has an A+ rating.

Porter Capital

Porter Capital is an alternative lender specializing in invoice factoring and accounts receivable financing. The company also has a special division, Porter Freight Funding, which is dedicated to working with businesses in the transportation industry.

With Porter Capital, you can receive an advance of 70% to 90% of your receivables and work with an account manager to customize a financing agreement that’s unique to your business. Porter funds startups and established businesses, offering fees as low as 0.75% monthly.

You can provide basic information about your business to get a free quote and receive funding in as little as 24 hours. Although Porter Capital isn’t accredited by the Better Business Bureau, it does have an A+ rating; the company also has 3.7 out of 5 stars on Trustpilot.

Additional options

Although AR financing and factoring are distinct, many companies blur the lines between the two. As you compare options, make sure you understand the type of financing a lender offers.

If you decide that invoice factoring may be a fit for your business, you might consider companies like FundThrough, Triumph Business Capital or RTS Financial.

Find and compare small-business loans

If accounts receivable financing isn’t right for you, check out NerdWallet’s list of the best small-business loans for business owners.

Our recommendations are based on the market scope and track record of lenders, the needs of business owners, and an analysis of rates and other factors, so you can make the right financing decision.

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Finance & Accounting

SBA Loan Collateral vs. Guarantee: What’s the Difference?

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Personal guarantees and collateral are both ways of promising a lender that you’ll make good on your debt. You may have to offer both to get an SBA loan.

Collateral ties a loan to a specific asset, like your business’s inventory or your home, which the lender can seize if your business can’t repay the loan. A personal guarantee promises the lender that you will repay the debt using your personal assets, but may not specify how.

In general, SBA lenders require anyone who owns 20% or more of a business to provide a personal guarantee. SBA loans larger than $25,000 usually require collateral, too.

Do SBA loans require a personal guarantee?

SBA loans usually require unlimited personal guarantees from anyone who owns more than 20% of a business. Lenders may ask for limited or unlimited personal guarantees from other business owners, too.

Unlimited personal guarantee: This is a promise that the guarantor (the business owner) will pay back the loan in full if the business is unable to. The lender doesn’t have to seize collateral or seek payment from any other source before going straight to the loan applicant for loan repayment.

Limited personal guarantee: If you own less than 20% of a business, you may have the option to sign a limited personal guarantee instead. The limited personal guarantee caps the amount you’ll have to pay the lender, either as a dollar limit or a percentage of the debt.

Limited personal guarantees can be secured by collateral, which means the lender will seize those assets when they recoup payment instead of asking you to pay back a certain dollar amount.

Who has to personally guarantee an SBA loan?

The SBA requires personal guarantees from:

  • Individuals who own more than 20% of a business.

  • Spouses who own 5% more of the business, if their combined ownership interest is 20% or more.

  • Trusts, if the trust owns 20% or more of the business.

  • Trustors, if a revocable trust owns 20% or more of the business.

SBA lenders may require additional personal guarantees.

Do SBA loans require collateral?

For SBA 7(a) loans of between $25,000 and $350,000, SBA lenders have to follow collateral policies that are similar to the procedures they’ve established for non-SBA loans. Banks and credit unions are usually the intermediary lenders for SBA 7(a) loans.

If you use an SBA loan to finance specific assets, like an equipment purchase, the lender will take a lien on those assets as collateral. The lender may also use your business’s other fixed assets as collateral, and you may have to offer personal assets, too.

For SBA 7(a) loans larger than $350,000, SBA lenders need collateral worth as much as the loan. The lender will start with your business assets. If they need more collateral, the SBA requires them to turn to the real estate you own personally, as long as you have at least 25% equity in the property.

Live Oak Bank is the largest SBA 7(a) lender in the U.S. by volume. Its loans may require collateral in the form of:

  • Personal residences.

  • Retirement accounts.

  • Commercial real estate.

  • Equipment.

  • Commercial vehicles.

  • Accounts receivable.

  • Inventory.

What if I can’t provide collateral or a personal guarantee?

If you’re seeking any type of SBA loan, there’s a good chance you’ll have to provide both collateral and a personal guarantee. Even SBA microloans usually require collateral and a personal guarantee. Without them, you’ll have trouble getting an SBA loan.

Some online lenders offer unsecured business loans, which don’t require collateral. But you may still have to sign a personal guarantee.

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