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Financing Your Small Farm

September/October 1993

by Karen Klonsky, Agricultural Economist, UC Davis

If you are a beginning farmer, you may be having trouble getting a loan. Perhaps you do not have enough money or assets to use as loan security. Maybe your bank does not make small loans because the costs are as high as for large loans, but the profit, based on the amount lent, is smaller. Other problems include the high risk of growing specialty crops.

Despite these problems, credit is available from banks, Farmers Home Administration, the Farm Credit System, and rural development corporations. These groups coordinate their efforts to develop loans that will appeal to small farmers as well as lenders.

Before applying for a loan, arrange for a co-signer (if necessary) who has the required collateral; and prepare a resume to demonstrate your profit-making ability.

Local Banks

Local banks are a source of short-term credit. Obtaining a loan from your own bank is a benefit to both you and your banker, because your interest rate will be smaller and you deposit your profits in the bank, increasing their income potential. Because the primary source of funds is from deposits, loan size may be small. Some local banks are able to offer long-term loans by selling the loans to an insurance company that provides the funds for the loan.

Farmers Home Administration (FmHA)

FmHA, an agency of the US Department of Agriculture, makes and guarantees loans to farmers who are otherwise unable to obtain credit. To qualify, you must be a permanent resident alien or US citizen, operate a family-size farm, have a satisfactory credit history, and have the education, training, or experience to operate a farm. The loans are to buy, expand, or improve operations. Some funds are targeted for socially disadvantaged operators who are African American, Native American or Alaskan Natives, Latino, Asian American or Pacific Islanders.

Eligibility is determined by the local FmHA county or area committee. Once eligibility is established, the county supervisor helps you design a farming plan. FmHA provides technical advice in carrying out the plan. FmHA also provides financial counseling.

If you qualify for a direct loan in all ways except cash flow, you may qualify for the "limited resource interest rate," usually three percent less than the going rate. The loan guarantee program includes a similar provision called "interest assistance." FmHA can subsidize interest payments up to four percent if it will improve cash flow to the point of making the loan acceptable to a bank.

FmHA guarantees loans for up to 90 percent of the loan and interest. Repayment terms range from one to seven years for direct loans. You negotiate the term and interest rate for guaranteed loans with the lending institution. The limits are $200,000 for direct loans, $300,000 for guaranteed ownership loans, and $400,000 for guaranteed operating loans. The maximum repayment term is 40 years.

FmHA will require you to pledge all assets as collateral. You must have a positive cash flow for a direct loan and a 20 percent margin for a loan guarantee. (A commercial lender generally requires a 30 to 40 percent margin on cash flow.)

There are state, district, and county FmHA offices in California. Obtain an application from a county office, usually located in the county seat. (Some offices serve more than one county.) Offices are listed in the phone book under United States Government, Agriculture Dept.

Farm Credit System (FCS)

FCS offers credit-related services to farmers and ranchers through three associations: Production Credit Associations which make operating and equipment loans, Federal Land Bank Associations which make real estate loans, and Agricultural Credit Associations which make operating, equipment, and real estate loans.

FCS organizations lend money from funds raised by the sale of bonds and notes. Most bonds are issued in denominations of $5,000 and typical maturity is six months. If you get an FCS loan, you are required to buy stock from between two and 10 percent of the amount borrowed. You get the stock back as the loan is repaid. There is a loan fee.

Once your long-term performance is established, only annual financial statements and crop progress reports are required for another loan and the credit check and verification are not as involved as for a new borrower. This reduction in paperwork reduces the costs of making the loan. You don't have to pay a loan fee each year. A revolving line of credit for a production loan can be made for up to four years. A multi-year production loan can be a problem, however, because you cannot be flexible in what you plant.

Association offices are located throughout California.

Regional Development Corporations

Regional development corporations make loans and guarantee loans to small businesses under the auspices of the California Department of Commerce, Office of Small Business. They are California Rural Coastal Development Corporation (Cal Coastal) and Valley Small Business Development Corporation.

Cal Coastal makes direct loans to farmers using the FmHA loan guarantee program. The primary purpose of their loan program is to assist farmers already in operation. Loans are available for production, real estate, and refinancing. The loans are guaranteed by FmHA and their eligibility requirements apply. Prior farming history is crucial for loan approval. Cal Coastal also guarantees loans from other lending institutions for up to 80 percent. Special emphasis is given to farm operations that will create or retain jobs. The maximum term is seven years and the maximum amount is $350,000. Cal Coastal serves the region from Santa Clara to Santa Barbara. For more information, contact:

Cal Coastal 
5 East Gabilan Street, Suite 218 
Salinas, CA 93902 
(408) 424-1099
Serving the central valley (Merced-Bakersfield):

Valley Small Business Development Corp. 
955 N Street 
Fresno, CA 93721 
(209) 268-0166

Although not a regional development corporation, SAFE-BIDCO participates in the Small Business Administration and FmHA loan guarantee programs, lending money for small businesses, including farmers, on the North Coast. For more information, contact:

145 Wikiup Drive 
Santa Rosa, CA 95403 
(707) 577-8621

For more informtion:

Karen Klonsky, Department of Agricultural Economics, 118 Voorhies Hall, University of California, Davis, CA 95616; (916) 752-2745.

Christensen, Robert L. 1984. Economics for Small Scale Food Producers. Cooperative Extension Service, University of Massachusetts, Amherst, MA 01003.

Kamoroff, Bernard. 1990. Small-time operator: how to start your own business, keep your books, pay your taxes and stay out of trouble: a guide and workbook. Rev. ed. Laytonville, California. Bill Springs Publishing.

University of California. 1991. California Farm Record Book, ANR Publication 3342, ANR Publications, 6701 San Pablo Avenue, Oakland, CA 94608-1239; (510) 642-2431.

Farm Credit System

California Associations

Federal Land Bank Association of Bakersfield and Bakersfield PCA
5555 Business Park South
Bakersfield, CA 93389
(805) 327-3234/2741

California Livestock PCA
8788 Elk Grove Boulevard, Suite L
Elk Grove, CA 95624
(916) 685-8516

Central Coast Federal Land Bank Association and Central Coast PCA
111 South Mason, Drawer AA
Arroyo Grande, CA 93420
(805) 481-5900

Central Valley PCA
800 W. Monte Vista Avenue
Turlock, CA 95381
(209) 634-2960

Federal Land Bank Association of Colusa and Colusa-Glenn PCA
310 Sixth Street
Colusa, CA 95932
(530) 458-2163

Federal Land Bank Association of El Centro and Imperial-Yuma PCA
1415 State Street
El Centro, CA 92243-2834
(619) 352-5112

Fresno-Madera Federal Land Bank Association
1240 West Olive Avenue
Fresno, CA 93728
(209) 441-7894

Fresno-Madera PCA
1250 West Olive Avenue
Fresno, CA 93728
(209) 233-2091

Intermountain Federal Land Bank Association and Sierra/Nevada PCA
Northeastern California
255 W. Peckham Lane
Reno, NV 89509
(702) 825-7282

Federal Land Bank Association of Kingsburg
1580 Ellis Street
Kingsburg, CA 93631
(209) 897-5814/5815

Northern California Federal Land Bank Association and Northern California PCA
130 Independence Circle
Philadelphia Square
School House Building
Chico, CA 95927
(916) 895-8698

Pacific Coast Farm Credit Services, an ACA
8741 Brooks Road
Windsor, CA 95492
(707) 838-4866

Sacramento Valley Federal Land Bank Association and Sacramento Valley PCA
283 Main Street
Woodland, CA 95695
(916) 666-3333

Sierra-Bay Federal Land Bank Association and Sierra-Bay PCA
3984 Cherokee Road
Stockton, CA 95215
(209) 931-3770

Farm Credit Services of Southern California, ACA
4130 Hallmark Parkway
San Bernardino, CA 92407
(714) 887-7018/6441

Federal Land Bank Association of Visalia and Visalia PCA
3010-A West Main Street
Visalia, CA 93291
(209) 627-5050

Federal Land Bank Association of Yosemite
800 W. Monte Vista Avenue<
Turlock, CA 95381
(209) 667-2366