One way to manage risk and avoid debt at start-up is to start very small and keep reinvesting farm revenue to grow your operation over time. If you are buying an existing operation or seek to sustain yourself full-time in just a few years, this strategy will probably not work for you. But many new farmers find it works to grow their business as their skills grow.
Residential Finance or Using Your Own Equity
While many banks are unwilling to lend money to an individual to purchase a herd of goats, for example, almost all banks offer home equity loans and/or other personal loans that you could use for your agricultural business. Home equity and personal loans may carry higher interest rates than business or farm loans available through lenders. Be sure to check rates and terms. Never finance a business using credit cards as interest rates are enormous and, if payments are not made, can quickly spiral out of control! If purchasing equipment or supplies (machinery dealers, a farmer selling animals, etc.) ask the vendor about their credit options and terms, as they may be more liberal than a commercial bank because they can easily seize and make use of the asset if payment is not made. Again, be sure you know the interest rates and terms. And be sure you have mapped out the cash flow of your business so you know you can afford to cover your payments.
Don’t assume you need to buy a lot of fancy equipment right at the beginning. Carefully assess the functions you need to perform on your farm, and think creatively about the possible solutions. Instead of purchasing machinery or specialized buildings, consider options for local custom hire opportunities. It is often better to hire someone to provide a service than to buy expensive equipment that loses value over time and requires maintenance, repairs and inputs. For example, would a neighboring farmer be willing to work your fields? If you produce a value-added product, is there a commercial kitchen available for processing food? This would avoid the expense and regulation of building a commercial kitchen. Click here to download a PDF of 2010 Custom Rates and Fees for various types of farm work.
Shiny Steel Disorder has sunk many a promising farm venture. Don’t succumb to the temptation to over-capitalize with expensive equipment or buildings, unless you have a well-researched business plan and can demonstrate exactly why you need to buy these things and how you will pay for them.