The final rule for the Farm Service Agency’s micro-loan program (ML) is now available on the Federal Register. We’ve taken a look and are pleased with the outcome. NYFC has been advocating for credit opportunities for small and beginning farmers for some time. We got policy makers thinking about this in 2011 and then proposed it in the Beginning Farmer and Rancher Opportunity Act. NYFC thanks the Farm Service Agency (FSA) for making this important change!
The final rule makes a few changes to the proposed rule released in May 2012 in response to submitted comments by organizations (such as NYFC and the National Sustainable Agriculture Coalition, NSAC), individuals, and FSA employees. Normally a 30-day delay between publication and effective date is applied. But the FSA believes for ML to meet the needs of farmers this season, it is necessary for it to be effective immediately!
The ML application process operates within the existing Operating Loan (OL) program framework but is simplified to reflect the smaller loan amounts and unique needs of small farmers. The final rule streamlines the application process, modifies security provisions, provides flexibility in meeting the management experience requirement, and updates the apprenticeship option:
1. Farm Assessment Requirements for ML applicants are substantially reduced
The assessment for an OL evaluates farm organization and key staff qualifications, type of farming operation, goals for the farm, adequacy of real estate and chattel property to conduct the farming operation, historical performance, farm operating plan, loan evaluation, supervisory plan, and training plan. The assessment for an ML applicant will be simplified and in the form of a narrative that will address the type of operation, assistance needed, goals of the operation, marketing plan, supervisory plan, financial viability of the plan, and training plan. Note: chattel property: items of movable personal property, such as equipment, livestock, etc.
We are thrilled the FSA is not requiring an itemized cash flow budget for ML applicants. For diverse vegetable growers, developing cash flows for each crop is tedious and not a representative measurement of success. To reduce undue burden, the FSA believes that “For applicants new to FSA who may produce non-traditional crops or with production practices where yield per acre may be less important, other factors, such as the production capacity, the consistency of income and expenses, and the timely harvest and selling of produce, may be more appropriate measurements to use in establishing actual productivity and projected plans.”
Reporting past yields will also not be necessary. Applicants can provide other forms of documentation such as operator’s sales receipts, financial statements, contracts, and tax returns. This benefits beginning farmers especially, who may not have operated a farm in the previous year.
2. ML’s will allow for flexibility in meeting the managerial ability requirement
The proposed rule allowed applicants to meet the managerial eligibility requirement though the traditional means (traditional education and farm management experience) OR experience managing their own farm through a self-directed apprenticeship OR past association with an agriculture related organization.
Comments to the proposed rule appreciated this flexibility but argued applicants should have at least one-full season of on-farm experience, not solely an association with an agricultural organization. The FSA agrees applicants should have at least one-year on farm experience and the final rule, therefore, “adjusts the proposed alternatives to require sufficient prior experience working on a farm or small business management experience combined with participation in a self-directed apprenticeship.”
NYFC recognized confusion between an apprenticeship and mentorship in the proposed rule that persists in the final rule. An apprenticeship generally runs for one season and is essentially farm labor with added training. A mentorship means an established, formal relationship between an individual who receives applied guidance and input from another individual with the skills and knowledge pertinent to the successful operation. Therefore, the FSA should use the term “self-directed mentorship.”
The FSA wants to ensure that applicants who have only had farm labor positions available to them are able to apply for an ML. A self-directed mentorship will allow applicants an alternative way to gain farm management experience for one season (“by seeking, receiving and applying guidance on how to manage their own start-up farm operation.”) Mentors will not be evaluated in the application process, to avoid burden on both applicant and mentor.
3. Manageable Security Requirements
The proposed rule suggested that MLs must be secured by collateral worth at least 100% of the loan amount to prevent barriers to meeting loan security requirements. In the final rules, FSA maintains that a security of 100% should always be sufficient. The requirement for additional security up to 150%, when available, will be limited to MLs for annual operating costs.
In addition, a lien on real estate (the right of the FSA to possess/sell real estate if loan is not repaid) is not required unless the value of farm products (equipment, livestock, other assets) is not at least equal to 100%.
NYFC commented that to ensure local field offices serve growers with diversified, organic and direct market farm operations, loan officers should be given special training in new farm business models. FSA maintains that in order to ensure a successful implementation of the program, local offices will be provided training when the program is introduced, and further training will be provided on a periodic basis. We hope this will training will allow state offices to be helpful resources for beginning farmers. We believe it would be tremendously helpful to have a state specialist on Community Supportive Agriculture.
5. Making sure the ML meets young farmers needs
NYFC and NSAC believe FSA should be required to track and publish information on microloan borrower participation to identify whether this program meets their credit needs. We urge the FSA to collect information on the type of operation, gross sales, years of experience, etc. to determine who is using the program and how to better meet borrowers needs. In response to our comment, the FSA reports that it is implementing changes into the system so that MLs can be evaluated separately from OLs. State offices will also compile the prices and yields of agricultural commodities, data on non-traditional and direct sales, and organic operations and make them available to the Service Center staff. We hope this information will be used to evaluate the ML program to best meet small and beginning farmers’ needs.
Frustrated with traditional loans not suited for your diverse, small-scale operation? The USDA’s Farm Service Agency (FSA) released a rule today modifying its Farm Operating Loans (OL) program to include micro-loans. These micro-loans are smaller, require less paperwork, and allow for a longer payment period to better address the needs of small and beginning farmers. The National Young Farmers’ Coalition applauds the FSA for developing a loan program that accommodates the unique credit needs of young and beginning farmers.
FSA’s current Operating Loans program has typically offered larger loans up to $300,000 to cover large farm expenses. The maximum loan limit for the new micro-loan program will be $35,000 and is intended for smaller purchases such as seeds, livestock, small equipment, as well as insurance and other operating costs including family living expenses and building repairs– investments desperately needed to launch a small farm business. Many lending programs only give out sums of $100,000 or more, which can be an overwhelming amount to a new farmer.
The micro-loan program has several features that differ from the Operating Loans program making it more appropriate for small-scale and beginning farmers. It calls for a shorter application process in comparison with the OL program and conventional farm loans. “Paperwork would go down from about 30 pages to seven” the Associated Press reports. And the loan doesn’t have to be repaid for up to seven years. Beginning farmers have struggled in the past to meet farm experience and managerial requirements– the new micro-loan program accepts apprenticeship and mentorship programs, non-farm business experience, and farm labor experience as acceptable alternatives!
Agriculture Department Secretary Tom Vilsack announced the program publicly today and said the new loans are an effort by the USDA to expand credit to minority, socially-disadvantaged, and young and beginning farmers and ranchers. The interest rate will be around 4.9 percent, Vilsack says.
The final rule establishing the microloan program will be published in the Jan. 17 issue of the Federal Register. Stay tuned for a more complete analysis of the rule. We believe applications will be accepted as soon as January 18th! Anyone interested in applying should contact his or her local Farm Service Agency office.
With all the questions that we get about the USDA’s Farm Service Agency (FSA), we thought that we should get those questions (and answers) put in writing. Chris Beyerhelm, Deputy Administrator for Farm Loan Programs at FSA, was kind enough to help us out. If you have additional questions that you’d like Chris to answer, let us know!
USDA’s Farm Service Agency (FSA) is the successor to a federal agency created in the 1930s to help repopulate rural America during the Great Depression. Over the years, the agency has gone through a number of name changes; however, its purpose has remained to provide assistance in meeting the credit needs of America’s farmers and ranchers. Today, FSA’s primary mission is to assist beginning and socially disadvantaged farmers and ranchers obtain credit to begin or maintain farming and/or ranching operations.
How are you different from other lenders?
FSA is the Lender of First Opportunity. FSA offers loans at lower interest rates and more favorable repayment terms to help applicants get started in agriculture. Commercial lenders are required by regulators to make loans to more financially established customers who have equity and a comfortable repayment capacity, whereas FSA offers loans to customers with less equity and less repayment capacity. At the same time, FSA is required to ask customers to pay off their loans and graduate to commercial credit when they are financially able to do so. This allows other beginning or socially disadvantaged farmers the same opportunity to get started and get on their feet financially.
What types of loans does FSA make?
FSA makes all types of loan related to the production of agricultural commodities. FSA offers 1 year operating type loans, up to 7 year intermediate capital item loans (i.e. machinery, livestock, etc.), and up to 40 year loans to purchase real estate. FSA makes direct loans (funded from government revenues), and guarantees loans funded by commercial lenders (guaranteed up to 95% by the government).
(Additional information on loans can be found here.)
What do I need to be eligible for an FSA loan?
There are two primary requirements to obtain an FSA loan. First, the applicant must meet the eligibility criteria, which include requirements such as United States citizenship, farming experience, and credit history. Secondly, applicants must be able to offer sufficient collateral (at least 1 to 1) to secure the proposed loan and develop a farm business plan that shows sufficient income to cover all expenses and planned payments. These requirements are not much different than any other lender is going to require.
The most important thing is to be prepared when meeting with an FSA loan officer for the first time. Applicants should have their financial information prepared and have a business plan which fully supports the loan request. They should also be prepared to be flexible if the loan officer has suggestions or recommends changes to the plans. Having a market for proposed commodities is also vital.
How much credit history do I need? Can someone co-sign my loan?
An applicant will not need a lot of credit history. FSA does not use credit scores to evaluate applications, but if an applicant has participated in credit transactions, we will expect that they have fulfilled obligations with previous creditors or have a good explanation for any adverse or delinquent account status. Co-signers are allowable if needed to show sufficient financial strength.
What size loan can I get from FSA? Is it easier to get a small loan?
FSA has a Direct Loan program with loan limits of $300,000 for operating type needs (1-7 year terms) and $300,000 for real estate needs (up to 40 years), for a total maximum of $600,000 per applicant. In addition FSA offers up to $1,214,000 in guaranteed loans, funded by commercial lenders, to be used for any combination of operating and/or real estate needs.
(Additional information on loan limits can be found here.)
Currently, FSA has a Lo-Doc operating loan (less than $50,000), which requires less paperwork than operating loans in excess of that amount.
Does FSA fund all types of farming operations? Could I get funding for a community supported agriculture farm? What about an organic operation?
FSA can finance most types of farming operations, including community supported and organic operations.
Do apprenticeships count as farm experience?
Yes, completing a farm mentorship or internship program with an emphasis on management requirements and day-to-day farm decisions is considered towards the experience requirements to obtain an FSA loan.
Do I need to have filed a Schedule F to get an FSA loan?
No, FSA requires applicants to demonstrate that they have some experience in farming. This can be demonstrated by education, on the job training, actual farming experience, or any combination of the three. Providing copies of schedule Fs is an easy way to demonstrate experience, but is not required.
Can I apply for an FSA loan online or do I need to go to an office?
Yes, forms can be found, and applications can be submitted, online.
However, at some point in the application process, an FSA loan officer will need to meet with the applicant in person to go over the business plan and discuss the terms and conditions of the proposed loan.
If I’m looking to buy or raise money for a new farm outside of the FSA district where I currently live, should I go to my local office or the office near the new farm? Is there coordination between FSA offices?
If someone has a specific area in mind outside where he or she currently resides, I would recommend making contact with the loan officer who serves that area. This is not required, but it is important for producers and loan officers to build a bond of trust and teamwork, and the earlier one begins to start to build that relationship, the better. In addition, a loan officer in the area where the operation will be located is going to be more knowledgeable on local conditions that might impact business decisions.
What’s new at FSA? Are there any new programs or services that young farmers should know about?
We just recently announced our Land Contract Guarantee program. Under this program a seller of land on contract can choose between getting a 90% guarantee or a prompt payment guarantee. By offering these risk protections to the seller, FSA hopes to encourage landowners to sell to beginning farmers.
(More information on this program can be found here.)