Freaked out about funding?
So you’ve decided to start a farm. You’re buzzing with excitement and anxiety about getting started, and maybe you’ve hit a few hitches in the planning process. You’re worried about getting the funding you need, and the world of financing can be overwhelming.
If this is you, then don’t worry! From grants and crowdfunding to bootstrapping and loans, you have multiple options to fund your farm. One of those options is the USDA Microloan, a loan built specifically for unique startup farmers like yourself.
In this post, we’re going to explore how to apply for the USDA Microloan as an Upstart Farmer, including:
- why a microloan is a good option for small startup farmers
- what the process looks like
- tips on applying
The benefits of the USDA Microloan
Farmers looking for money to jumpstart their farm (or farm expansion) should seriously consider the USDA’s microloan program. The microloan is built for alternative farmers growing niche crops or serving niche markets, including “those using hydroponic, aquaponic, organic and vertical growing methods.”
In fact, I’ve spoken with two Upstart Farmers who have recently received the microloan—Carey Martin (who spoke about it in the “Funding Your Farm” course), and Chris Elliot.
The microloan is a great fit for small, “alternative” farmers who are starting new farms.
We’ve noted before that starting a farm is becoming a more accessible goal to anyone with a few thousand dollars (the microloan provides up to 50K) and work ethic. These funding opportunities just add to that trend.
This is perfect for the Upstart Farmers, most of whom start small with specialty crops and/or specialty markets. Often, they are completely inexperienced in the field, but ready to sweep their communities off their feet with high-quality local produce.
The USDA Microloan is especially geared towards new and “underserved” farmers; in fact, over 70% of the loans provided have been given to just starting farmers. This year, the FSA (Farm Service Agency, a part of the USDA) expanded the loan from operating costs to include building costs.
On top of that, the microloan typically has low-interest rates. Chris’ loan runs interest at 2.25%. That’s a very low rate hard to find at a bank!
The process: how to apply for the USDA Microloan
Of course, some loan applications can be tedious and overwhelming. Not so with the USDA Microloan. Chris says that because he already had his financial planning done before filling out the application (you should do this prior to seeking funding, by the way), filling out the application only took an hour.
The office was able to answer all questions about completing the application process.
“They were good about answering questions, so don’t be afraid to ask,” advises Chris. “Unlike a bank that’s trying to determine whether or not they can make money off you, they’re really just trying to help farmers out.”
Many entrepreneur-focused institutions will have the same helpful attitude. “We found a bank out of Pittsburgh that does startup loans and they have a lot of ancillary benefits that really are helping out. I would imagine there are similar banks around the country. You pay more in interest but they actually will work with you [unlike some] traditional banks.”
After that, the application should only take a few weeks to process. Factor in time for mailing, since many loan offices won’t take faxed forms. The loan office will be able to give you more specific timelines depending on their staffing.
Challenges and tips for applying for the USDA Microloan
Although the loan application and process are streamlined for beginning farmers like you, there are several things that you can do to avoid hiccups and keep things moving. Chris had several insights for small Upstart Farmers.
1) Work to get loan managers the info they need.
Since loan managers aren’t usually familiar with vertical indoor growing, their questions might not be easy to answer, and the application might not be designed with questions suited to your farm. For instance, there might not be enough space to give a complete answer. Units might not be applicable (e.g. “How many acres are you farming?”). The loan managers will want to know assets and debt—although you might not have any.
Chris says that this can be both good and bad.
“At a high level, we are a different breed than what the farm loan managers have ever experienced. They truly didn’t know what to do with me… This is a good and bad thing. They didn’t know enough to ask really tough questions, but they also didn’t know enough to figure out some easy ones on their own either.”
What to do: For assets and debt, ask if you can fill it out as though you had been in operation for a year. If they ask about the assets of the spouse who is not tied to the farm or the loan, just explain the situation and work with them to come up with a solution. The important thing here is that they have the information they need to make a good decision. So get it to them! Maybe there isn’t enough space for a financial plan. Summarize yours and send them the complete document on your own.
2) Turn everything in at once.
Make sure that you have gathered all of the documents and forms that you need, and turn them in at the same time. If you’re missing pieces, your application will be marked incomplete and after a certain amount of time, the application will be discontinued.
3) Know your numbers.
Depending on the farm manager, confidence in your financial and production planning can really sell them on your farm.
Carey Martin noted that having someone look critically through your financial plan can be a huge asset, as they will spot holes and help you patch up rough spots.
4) Use Upstart University as the required mentor and training certification.
“They wanted to make sure that you have some kind of educational experience in farming, and be training or have a mentor. That was a hurdle I had to get through. I was actually able to use [Bright Agrotech] as a mentor and taking Upstart University; collecting those certificates worked as a legitimate training.”
5) Match your lease to your loan (and have an escape clause)
“One of the other hurdles that I came across was the length of the loan had to match the length of our lease of the warehouse. So we had to change our lease to a 7-year lease to match the 7-year loan. If that is the case across the board, farmers have to really try and negotiate a good escape clause in their lease in case things don’t work out.”
6) Be prepared for difficulty with additional liens
“One other issue was that USDA required to have the first lien on our equipment, so any additional lenders would have to take a 2nd lien, and a lot of the traditional banks did not want to do that. We had a hard time finding additional financing due to this. They won’t share the lien either, it has to be the first and only first.”
7) Be sure about farming before signing a loan
One of the challenges of entrepreneurship is knowing feasibility before diving in. We encourage anyone thinking about starting a farm to do a feasibility study or workshop to outline the costs, debt, and profit in depth.
Why is this important? Well, even though farming is becoming more accessible through tech and resources like the USDA microloan, it’s still hard work. Know the labor and other challenges involved, or else you might find yourself in a career that you don’t love.
An important thing to consider is that the USDA Microloan requires immediate payback if you decide not to farm after getting it. Your payment plan becomes void and you have to pay back the money right away. If you’ve already spent the money, this could put you in a tough situation. Some other loans are like this as well, giving you another reason to be sure about farming before starting up.
Is the USDA Microloan for you?
The microloan has served multiple starting farmers and might be the best option for you.
If you want to look at some other funding options like grants and crowdfunding, go through the Funding Your Farm course on Upstart University.
And if the USDA Microloan is for you, you can get links to forms, instructions, and FAQ’s here.
Remember, financial planning should happen before funding!
Want information on starting a commercial farm? It can be tough to find. That’s why we’re walking aspiring farmers through the planning process in our Feasibility Workshop. In the online workshop, we’ll go through the process of creating your own in-depth feasibility study to help you make the business case for your future farm.