Agriculture Term Loans Explained

5 minute read

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As you consider your financing options for land, equipment and other farm purchases, two common types of loans you may come across include term loans and operating loans – also known as an operating line of credit.

While both loan types can fulfill your borrowing needs, it’s important to understand the key differences between them so you can make an informed decision of which loan option best suits your operation. 

In this article, we explore the purpose, use cases and repayment considerations of term loans versus operating loans to help you determine which financing option is the right fit for your agricultural needs.

What is a term loan?

Term loans are specifically designed for significant expenditures or long-term investments in farming operations such as purchasing land, buying machinery, constructing facilities or other large capital outlays.

Typically, term loans involve a lump sum disbursal at the beginning of the loan period and have a fixed repayment term often spanning several years. Term loans may be secured by collateral which in some cases can include the asset being financed, or in other instances may require a personal guarantee.

What is the difference between a term loan and an operating loan?

Compared to term loans, operating loans are generally more short term in nature and provide working capital to cover day-to-day expenses in your operation. For example, an operating line may be used to purchase seed, fertilizer, fuel, livestock or cover labor costs during peak operational periods.

Operating loans are designed to help manage cash flow fluctuations. Unlike term loans, operating loans may not require collateral, but they are typically repaid within a year or a single production cycle.

The following chart highlights some of the key differences between term loans versus an operating line of credit. 

Term Loan vs. Line of Credit Overview

Which loan option is right for your operation?

Determining which loan option is the right fit for your operation involves careful evaluation of your specific circumstances, financial needs and long-term goals. Here are some key factors to consider when choosing between a term loan or a line of credit:

  • Identify the purpose of the loan and assess whether it aligns with long-term investments or immediate operational needs
  • Analyze your cash flow patterns and determine if you require short-term liquidity or long-term financing.
  • Evaluate your ability to make regular loan payments based on your projected income and cash flow projections.
  • Assess the availability and value of any collateral you can offer as it may affect the interest rate and loan terms.
  • Compare the interest rates, terms and conditions offered by different lenders for both term and operating loans.

Consider your future plans for expansion, diversification, or upgrading to align your loan choice with your long-term objectives.

How can I get started with a term loan?

When applying for a term loan, be prepared to share some basic information about your operation, your financial background and what you plan to utilize the loan funds for. Your repayment capacity and credit history will be factored into the approval decision. 

Once approved, your local lender will work alongside you to choose the rates and terms that best fit your operation’s needs. If your financial needs change, you may be able to convert a variable-rate loan to fixed-rate loan or a fixed-rate loan to a variable-rate loan. 

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