The Food Lawyer

Starting or expanding a farm is an expensive proposition. A few weeks back I posted about using leases to expand acreage without massive capital investment. If you do need capital, however, either for new land or for equipment that will make you work more efficiently, there are sources of financing an agricultural business that are available to no other industry.

For agricultural loans, commercial banks use a specific body of law called the Uniform Commercial Code to help facilitate their lending transactions. Article 9 of the Code lays the groundwork for the rules that banks use to secure the loan they make to a farmer. In exchange for credit, banks can claim rights to the proceeds of the sale of farm products as a means to collateralize their loan. This “secured transaction” works much like a mortgage or a car loan. A bank’s loan against secured farm goods is recorded with a state agency, like the Secretary of State, and are available to the public for review. Some details of secured transactions are publicly available so that other lenders can see that a farm has already borrowed money against a crop. The public recording prevents farm owners from re-collateralizing the same goods to a different bank. This particular aspect of Article 9 makes banks feel comfortable they will see their money again someday. 

Believe it or not, easy access to this kind of credit from commercial banks may vary with your geography. In midwestern states in particular, revolving credit transactions based on Article 9 are a fact of life. This is especially true in the commodity culture. In other areas such as Long Island, a place with some of the oldest continuously cultivated land in the United States, the lending culture is entirely different and the use of the UCC lending system has atrophied. Banks are aware of how lending via the system works, but they are reluctant to use it.

A study published last year by the W.K. Kellog Foundation, Financing Farming in the U.S., further discussed some reasons for the reluctance of certain banks to finance small farm operations. Most banks are simply unfamiliar with the economics of small scale agriculture. They prefer to finance the cultivation of crops with time-tested markets like corn and soybeans. Though the prices of these crops may fluctuate from year to year, they will always have a buyer somewhere, which means that the creditor will never lose all of its investment. Newer crops and niche corps are more speculative and are a less-attractive investment for rural lenders. 

The United States Department of Agriculture has a bunch of programs designed to help local commercial banks overcome their hesitation to lend to untested businesses growing unfamiliar products. A program like the Business and Industry Guaranteed Loan Program take some of the risk and uncertainty off of the balance sheet of a commercial creditor. The Rural Energy for America Program Guaranteed Loan Program is another loan-facilitation program that can help homesteaders finance their dream of dropping off the grid with their own renewable energy source. 

Last but no least, there is always grant money. The Value Added Producer Grant is the most well-known, but there are also smaller, regional grant programs, like those available through S.A.R.E. Grants are great money, but never build a business plan around becoming the beneficiary of one. They are a pain to apply for, the wait times are usually lengthy, and each application is a long-shot. if you do get one, great. If you do not, your business plan should be solid enough to not even notice.

Raising capital for any business is always tough, but farmers seem to get more assistance than other industries. With so much attention being paid to small-scale farmers, there are abundant options to creatively finance the farm of your dreams, or at least some of the important pieces of infrastructure on it. 

You can read more about food law at jasonfoscolo.com