Farmers Limited Access to Capital

This is the second article on why farms fail.  

Small farms have it tough when it comes to getting financing. This can make it hard for them to grow. Often, small farms face limited access to capital for a few reasons: farming is a risky business and, to be honest, one that’s prone to failure. Many farmers don’t have the kind of collateral banks want to see for a loan. Banks aren’t generally willing to base loans on the farmland itself but rather on the farm buildings or equipment you’ve got on it. And in rural areas, it’s not like you have a bunch of banks nearby focused on farming. 

 There are some agencies, like the Farm Credit Bureau and the USDA’s Farm Service Agency, that offer loans for farmers. We’ll dive into those a bit later, but it’s important to know they exist. With limited access to traditional capital, though, it’s critical for a new farmer to look ahead—beyond the first year, ideally out to year five—and figure out how they’re going to fund their growth and make the farm sustainable. 

Now, let’s talk about where you might be able to get the funds you’ll need. Most of this depends on what "you" do to make a plan. 

 One of the best places to start is with personal savings or an off-farm job. In my case, my wife worked as a schoolteacher, and I’d retired from the Army. That extra income made a huge difference for us. Here’s the first major tip for anyone new to farming: don’t quit your day job just yet! If you’re in a relationship, it’s usually a good idea for one of you to keep working. I also recommend getting some good, solid experience in another career first—something you can use to make a living if the farm doesn’t work out right away. Ten years working somewhere else gives you a cushion, a backup plan, and the chance to save up cash for the farm. And if that job lets you work remotely, even better! 

Another option is to start with a short-term, high-intensity enterprise that brings in money quickly. Let’s say you want to go into beef production. There are a few routes you could take, like a cow-calf operation, raising stockers, or even running your own small feedlot. But no matter the approach, beef farming takes a good bit of upfront cash for cattle, fencing, feed, and equipment. With a cow-calf setup, you’re looking at about two years from insemination to sale of that first calf. Stockers are quicker—about six months—but still require a big upfront investment. So, for new farmers, it might make sense to consider a faster option to start. Broiler chickens, for instance, can bring in cash in a few months. Pigs have quick turnarounds too, but the hog market can be very unpredictable. You might also look into baking for farmers’ markets. Fresh pies, breads, and desserts sell well and can bring in income pretty quickly. 

The government, specifically the USDA, also has options worth looking into. The USDA’s Natural Resources Conservation Service (NRCS) has representatives in every U.S. county. They offer a few grants that can help farmers, such as the Environmental Quality Incentives Program (EQIP) and the Conservation Stewardship Program (CSP). These can be good sources of money, but to qualify, you typically need to have been farming for at least three years. 

EQIP can be harder to get because it’s awarded at the county level, and, in some areas, “outsiders” might face challenges. In our case, since we weren’t local, we were turned down for an EQIP grant. That’s not always the case, but it happens enough that the USDA and Congress have adjusted some of the requirements. CSP is a bit easier to get since it’s overseen by your county NRCS agent, and we’ve been with CSP for 11 years now. For new farmers, this is the program I’d recommend pursuing since it offers significant funds and can be easier to access. 

Lastly, there’s always the option of bank financing. In our case, we took out a second mortgage for a large expense, which got us what we needed, but it was a variable interest rate. Once we finished construction, we started paying it off as fast as we could to avoid those interest rate hikes. Bank loans are out there, but paying them off can be challenging when you’re just starting out. 

The reality is that finding money to start or expand your farm isn’t easy. Most farms don’t see consistent profits until around year five or even year ten. You have to be ready for that and pace yourself. I also wouldn’t recommend raiding your retirement funds just to fund the farm. 

In a future post, we’ll get into more detail on business planning, but for now, I’d say this: have a solid plan, think carefully about your capital needs, and don’t rush into big investments until you know you’re on solid ground. Starting small, keeping a steady income, and making careful decisions can make a big difference as you build your farm operation.