How to finance your small farm

The biggest hurdle blocking the way to your own small farm is, most of the time, money.
Buying a property, getting your basic equipment, all the seeds you need, and paying your bills for the first couple of months until you actually get your first harvest is very expensive, so how can you finance your farm?

There are multiple approaches, to financing your farm. The overall rule of thumb is: If you already established your own small farm and only want to invest in your own property a business loan would be best for you. Should you just start out farming, choosing a residential loan is preferable

You might ask now: So what’s the difference between the two types of loans? What is required to apply for either of these? And which one is the best for my situation?

Difference between business and residential loan

There are some Key differences between a business and a residential loan. Let’s start with the most important ones:

  • A Business loan will help you start or advance your business. It is more regulated and tied to you working as a farmer full-time, to improve your business as much as possible. Applying for this loan will require a clear business plan, but more about this topic later.
  • Residential loans are granted by banks to help you finance your own property. In this case, using this property for farming is of no importance to the bank, as long as you can repay your debt.
  • There’s also a third option of government-specific funds, like the FSA/USDA, most importantly they try helping out begging farmers. Offering a wide array of different loans for property, equipment, and much more. They however will only provide up to 300000$. And work similarly to regular business loans.

What do I need to apply for a business loan?

Applying for a business loan can be very tough, especially if you just got started. This option is mostly only for small farms, which are already established as a business and either want to expand or buy land to advance production.

To Apply for a business loan you will need:

  • A Resume – providing background and experience
  • Income tax statements for the last 3-5 years: => balance sheet, income statement, and cash flow statement
  • The loan amount and uses – provide how much you need for which property
  • Insurance information – You won’t get a loan without insurance for the lenders
  • Business and Marketing plan – to show your goals and give further insurance to the bank
  • Sales contracts – If you can provide a list of customers, you are more likely to get approved for a bigger loan.
  • Any additional information ensuring your business success
  • Personal Information
  • Providing 5-10% of the property price up front

If you have all this information, know the property you want to buy and are sure about taking on a big loan, contact your preferred lender and ask for a quote. Here is a link to the FSA loan program.

What do I need to apply for a residential loan?

Applying for a residential loan can be easier, given that you do not need to provide any business-related insurance for the lender. You still have to provide proof of your financial ability to pay your debt and provide a mortgage.

These documents are required to apply for a residential loan:

  • Tax returns – to give your lender an overall understanding of your financial situation
  • Pay stubs – Additional proof of income
  • Bank statement and other assets – Insurance for the lender
  • Credit history – to evaluate your potential risk
  • Property information and price
  • Personal information
  • Between 10-25% of the property price up front

Buying your own property will be the most important step to starting your own small or hobby farm. Are there any alternatives to getting a loan?

What is the best choice for my situation?

There is no cookie-cutter answer to this question, as it obviously depends on many more factors. Overall, if you already have an established farm business and a very clear idea of a property, you want to own a business loan that might work for you.

By choosing a residential loan, you are more open to your business development. For example, a hobby farm is best suited with this loan, as you will not make any substantial amount of money by farming and mostly support yourself with another job outside of farming.

Both of these methods do however pose one big downside, which is a huge red number in your bank account for the next 15-30 years. There are alternatives, but these require some sacrifices on your side. You will have to be more flexible when it comes to your farms location and the property itself. Also adopting some money-saving methods can help you realize the dream of a debt-free farm.

Starting a farm without debt

Before putting yourself in debt for a long period of your life, you really should consider some other options. 
I am not saying to give up a property, which you definitely see as your dream farm. Honestly, if you know exactly which place you want to buy, go for it! The previous chapters gave you all the information you needed.

However, if you are unsure about a property, or even the way you approached starting a farm the rest of this article can give you another perspective on financing your farm. 
I personally wanted to opt for debt-free financing for my farm, as debt is the most common reason for farms to fail.

Let’s first look at some important first steps to get a picture of your ideal property.

Property size and beginning cost

Deciding for your required property size is always a good first thing to do. This will obviously depend on your goals with your small farm. If you want to keep bigger animals like cows, horses, or goats you generally need a much bigger property, in comparison to someone, who only wants to grow fruits and vegetables. 

Overall a reasonable size for a farm with animals is about 12-15 acres. Without animals around 4 acres can be enough. Furthermore, you have to decide, to either specialize in some specific plants using mostly cash crops or grow a more diverse array. The latter will also require more land so add another 2 acres to the first estimates. 

To get a better and more precise picture, check out this article about what’s a reasonable size for a small farm.

Now calculate your current budget, as well as a general idea of your monthly spending. Once you have all this data you can start putting together a picture of properties, which are a possibility for you. With all these numbers in mind, the possibility to start a farm might look pretty grim, but that’s not the end of the story, so how do you finance your farm without much money?

Starting a farm without much money 

There are many great ways out there to start a farm on a tight budget. Not all of them will work for you so decide for yourself if any of these methods work for you. A combination of multiple methods can also help you further decrease initial costs.

  • Ask a farmer or gardener with a lot of land for a small plot to use. This is one good way to get going without any big initial investment. You can start your farming business or produce your own food. This works best if you continue working another job on the side to earn a steady income, but choosing to work full time on this land can be accomplished. In return, you either pay a small amount each month or work for the farmer during very busy periods.
  • Another method would be using community-provided land or unused private land. While this can be hard to set up in the beginning, it is a really good way to already start working on a piece of land, which you want to buy later on.
  • Start small. Cultivating a smaller area will cut costs significantly in the beginning. Farming is not an all-or-nothing business, you can build up your enterprise over time, working a regular job until your farm can finance itself.
  • Another great way to start your farm without much money is by cutting both livelihood and property costs. One way to do so is living in a Camper van or tiny house. While this way of living certainly is not for everyone, it can help you cut down costs, as you now only require land to grow plants and keep animals.
  • Cutting living-related costs, by producing most of your own food, and cutting out more expensive foods can help you save up a lot more money before and while cultivating your farm.

Related Questions

Should you finance your farm with a loan? I definitely would advise you to not take on any big debt, if you are not 100% sure you found the perfect place to live in. Keep in mind taking on a big debt, will require you to pay a certain amount every month (500$-3000$), and you have to cover the interest and other farm and living-related costs, this is the most common cause, why farms fail.