The Farm Service Agency has a guaranteed loan program available to assist farmers and agricultural lenders. Guaranteed loans are made by a commercial lender, Farm Credit or a bank.
The Farm Service Agency provides the guarantee to the lender, not the borrower. The lender makes and services the loan. Guaranteed loans are the property and responsibility of the lender.
The purpose of the FSA guaranteed loan program is to assist lenders in extending credit to family farmers who do not qualify for standard commercial loans with the lender. The goal is to assist beginning farmers and farmers experiencing financial distress due to disasters or economic problems.
Often beginning farmers lack the required equity to meet commercial loan standards.
Farmers who have suffered a disaster often need to restructure their debts to improve the operations cash flow. A portion of the guaranteed loan funding is targeted to beginning farmers and socially disadvantaged farmers.
The FSA guaranteed loan limitation for fiscal year 2012 is $1,214,000. This limitation is adjusted annually based on an agriculture inflation index. There are three types of guaranteed loans: farm ownership, term operating loans, and operating line of credit loans. A borrower can have one type of loan or a combination of all three types of loans.
Guaranteed Farm Ownership loans can be used to purchase farm land, construct buildings and facilities, and to refinance debts to restructure the farm business. The term of the loan can be up to 40 years. Generally most lenders make 15 or 20 year real estate loans. In the case of farm ownership loans, the borrower must be the owner and operator of the farm real estate after the loan is closed.
Guaranteed operating loans can be used to purchase farm equipment, livestock, fixtures, and for operating expenses. Operating loans can also be used to refinance existing operating type debts. The term of the operating loan can be up to seven years and will vary depending on what the funds are used for.
Guaranteed operating line of credit loans can only be used for annual operating expenses. The loan has a term of five years but must be paid down to $1 each year. Each year, the lender and FSA review the projection for the next year and determine if loan funds can be advanced for the next year’s operating expenses. This way the borrower is only charged one loan closing fee and one loan guarantee fee.
For most FSA guaranteed loans, the maximum guarantee is 90 percent. The guarantee fee for most loans is 1.5 percent of the guaranteed portion of the loan. As an example, for a guaranteed loan of $100,000 the FSA guarantee fee is $1,350. The guarantee fee is waived for beginning farmers who are also participating in the direct Down Payment Farm Ownership loan program.
The FSA guarantee offers an additional option to the lender. There is a secondary market for USDA guaranteed loans where the lender can resell the guaranteed portion of the loan.
For long-term farm ownership loans, this allows the lender to reduce the interest rate risk, increase the lender’s liquidity by bringing the majority of the loan funds back quickly, and allows the lender to offer more flexible repayment terms. Also the lender generally receives a servicing fee for collecting the payments and servicing the loan from the secondary market buyer.
The FSA guaranteed loan program is in addition to the FSA direct loan program. The direct loans have more eligibility limitations than the guaranteed loans. The direct loans are limited to a maximum of $300,000.
Additional information on Farm Service Agency guaranteed and direct loan programs may be obtained by contacting the local FSA office to arrange a meeting with a loan approval official or at www.fsa.usda.gov.
That’s all for now,