Young farmer loans: some insight on the FCC

young farmer loans - young farmer grants

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I had a conversation with my sister in-law the other day.  She is in the process of trying to buy a farm. The interesting part is that she is going through Farm Credit Canada(FCC) and is trying to get the Young Farmer Loan.

Normally, when you are buying a house you have to put a down payment that is nothing new. Most of the time the down payment is between 5-15%, which isn’t too bad for a house. For new farmers the problem is a bit more interesting.

Let’s say you want to buy a relatively cheap farm that is $500,000. Apparently, if you want to buy a farm through FCC they ask for a 25% down payment. Just a bit of math here. 500,000*0.25= $125,000.

Seriously?

My sister-in-law is in a pretty good situation, but she does not by any means have that kind of money around. I mean, “who has that type of money”?

It is a serious chunk of change. If you are a young farmer, saving up that much money isn’t  easy no matter how you look at it.

When she told the person that she didn’t have that kind of down payment, the person told her can’t she get it from somewhere else? Ask your family?

Perhaps it was the way she told the story? I am not sure, but they didn’t seem very nice. Also, not all families can support you financially like that.

Options

Other options than young farmer loans? You can go to the bank and see what they will give you. They went to the bank to see what the situation was there as well. The same thing happened they had to put a 25% down payment down on the place. However, I believe a bank is able to work with you a bit more in this area.

Young farmer loans

While they are willing to give you $500,000, they want you to put a 25% deposit down. On a farm that is a lot of money. As a new farmer, I know I don’t have that kind of money around. Of course you would be saving for something like that, but it isn’t easy.

Young farmer loans through FCC isn’t necessarily  the best choice, but it is a choice for new farmers. It is better to have some options than none at all.

Last thoughts

New farmers and young farmers have a tough road ahead of them. It isn’t just the financial side of things, there are many other barriers that you have to face.  If farming is the right choice for you, you will do everything in your power to make it so.

 

Have you gone through this type of situation? Please share it.

 

 

 

Comments

  1. Thanks so much for your comments. I’d like to provide some clarification that may help.

    You are correct in saying that down payments for residential houses usually range between 5 and 15%. However, financial institutions – i.e. banks, Credit Unions and FCC – have higher down payment and/or security requirements for commercial operations (and farms are considered commercial).

    For commercial operations lenders look at a number of factors and FCC is no exception. As a responsible lender, FCC makes every effort to ensure all of its loans meet the 5 C’s of Credit:
    1. Character: training, knowledge, experience, financial skills, credit history, integrity.
    2. Capacity: past and projected financial performance, outside income, working capital, quality of the current assets.
    3. Commitment: the level of capital the borrower is investing and has access to.
    4. Collateral: security available and offered, valuation.
    5. Conditions: legislation, market, economy, environment.

    In the case of the FCC Young Farmer Loan, it’s not uncommon for the existing operation or the families of young farmers to offer additional security to meet FCC’s security requirements. This then allows young farmers to take advantage of the benefits of the loan: variable rates at prime plus 0.5% and no fees. http://www.fcc-fac.ca/en/products/lending/Young_Farmer_loan_e.asp

    FCC’s Transition Loan is an alternative product that offers an opportunity for a young farmer to buy farm assets with a reduced down payment or no down payment, with the cooperation of the seller. http://www.fcc-fac.ca/en/Products/Lending/Transition_Loan_e.asp

    Please see our latest news release for more tips on applying for a loan: http://www.fcc-fac.ca/en/AboutUs/Media/news20121227_e.asp

    Thank you for sharing your views so we could weigh in.

    Andy Tate
    Senior Strategist, Media Relations and Social Media
    Farm Credit Canada

    • Let me start by thanking you Andy for taking to the time to provide some insight into this particular issue. I had contacted FCC before, but I didn’t get the information I was looking for. So I appreciate you responding.

      I understand that farms are commercial and thereby need additional security. Does that only mean a higher down payment? Or are there other forms of additional security?

      Also, I read the latest news release, and I have advocated for creating a business plan in a previous post. I am unsure what the fine detail are of my sis in-law’s situation as that is very personal information.

      Furthermore, I understand from a business perspective that lending to someone isn’t good business, and to do so wouldn’t be favourable for the business.

      However, from a personal perspective, coming up with a large down payment is difficult for young farmers. Particularly, in situations when one’s family is unable or unwilling to provide the additional money to make a down payment.

      Thank you again for you time.

      • Sorry I wasn’t clear on what we mean by “additional security”.

        The term “down payment” typically refers to putting cash down. Creditors like to see cash down on a deal, as it confirms the customer’s ability to manage cash and to save money. That being said, most young farmers usually don’t have much cash to put into a purchase (as you’ve mentioned). That’s why the FCC Young Farmer loan does not require cash as a down payment.

        FCC seeks to create a buffer between the amount of the loan and the security offered. We refer to that as the loan-to-security ratio. That buffer can consist of cash down on the purchase and/or some additional security. The additional security can come from a number of sources. Perhaps the young farmer bought a house a number of years ago and has built some equity in it. Perhaps the young farmer has paid for some equipment. Another scenario might be that the young farmer has family members who own land that is paid for or represents significant equity. These types of assets are considered additional security and can be used to enhance the loan-to-security ratio.

        As an example, let’s assume that a young farm couple wants to buy a $105,000 parcel of land. They have been saving about $1,000 per year for the last six years, and have $5,000 cash to put into the purchase. This leaves them with enough left to pay legal fees and closing costs (remember, there is no application fee under the FCC Young Farmer loan). This means that they need a $100,000 loan. An uncle really wants to see his niece succeed, but doesn’t want to offer cash. He does own a small parcel of land that is free and clear, and worth $28,000. He is willing to let his niece put a mortgage on the land.

        In this instance, there is a $100,000 loan and $133,000 of security ($105,000 of security from the purchase, plus $28,000 of ‘additional security’ from the uncle), which produces a loan-to-security ratio of approximately 75%. This example would hold true even if the young farmer had no cash and the uncle had $35,000 worth of land to offer as additional security ($105,000 loan and $105,000 of security from the purchase plus $35,000 of additional security is approximately 75%).

        We hope this helps to explain what we mean by additional security.

        Thanks so much for engaging us in dialogue.

        Andy

  2. Hi Iain,

    Just wanted to add a quick note from a young farming couple that was able to save enough for the down payment and successfully start under FCC’s young farmer loan. We were one of the first ones accepted.

    For us, the program has been a huge benefit…our interest rates were just about cut in half, plus with the admin fees waived. It was the best package we could put together from any lender we approached (banks included).

    As an added bonus, we’re happy to be backed by FCC because they ‘get’ agriculture. Our gut feelings weren’t always the best with a couple of the other lender options we looked at…when they couldn’t tell the difference between a dairy vs. beef cow, we were a little nervous.

    That’s been our experience. We have a strong relationship with our local FCC rep. A thought out business plan was key for us. We’re now following it to the letter as we find our way through our first official year.

    You mentioned: “If farming is the right choice for you, you will do everything in your power to make it so.” So true! The downpayment may be a challenge to scratch together, but if you want the end goal badly enough, you’ll find a way.

    • Hello Kim,

      Thank you so much for reaching out to me and sharing your positive story about FCC. I’m glad to hear a positive young farmers story. I was beginning to think that it was impossible to get a down payment, so I am ecstatic that you got the loan. It lets young farmers know that it is possible.

      From what I have gathered so far, it seems like the business plan really is the key in this particular situation.

      If you don’t mind me asking, what percentage was your down payment, so other young farmers can get a sense for what they are getting into. If you don’t want to share that information, I understand it is personal.

      As a side note, I didn’t mean to sound as if I am against FCC because I am not. I think the young farmer program is great for people who need financial backing. Also, because they understand agriculture it adds another positive layer to the relationship.

      Thanks again for sharing your story Kim.

      • Hi Iain,

        Yes, the business plan is the key. We were young, keen and walking into a meeting with a lender wanting to look professional. Having a business plan in our hand helped make a solid first impression to show we weren’t flying by the seat of our pants and had thought our plans through and put numbers to it.

        While the idea of making a business plan sounded scary…really it was quite simple once we sat down and started putting it together. In all we had about 10 pages — 5 pages of actual typing (our mission, who we were, farming goals, planned facilities, machinery and animal plans/needs, how we would market our product, HR needs, etc.) and another 5 pages of add ons (networth, expected cash flow for year one, resumes, etc.)
        A quick google search of ‘business plans’ helped make sure we weren’t missing any relevant things we could describe for our situation.

        The monthly cash flow projection for year 1 (2 pages for us) took a bit of time to think through, and we made some phone calls to suppliers, etc to price check things we weren’t sure about. If making an educated guess, be conservative (it’s better to overestimate expenses and underestimate your income to leave wiggle room).

        Treat a lender meeting like a job interview. First impressions are important. You want to show them you’re a business person – so look the part and be sure you know your business plan inside out.

        Expect that they will look for your down payment to be right around the 25% mark. Oh – while I’m thinking about it…this particular ‘young farmer loan’ program is capped at $500,000. We learned that if you happen to be asking for more than that, the first $500K can still fit under the program, just not necessarily all of what you’re asking for (they’ll fit the rest under other programs, perhaps with different interest rates and terms). Which reminds me, other young farmer-related loans are worth looking at….I remember reading about one loan program specific for farms transferring between two generations as on-going concerns. There’s also the advancer plus loan which could fit for other young farmers too. It’s worth taking the time, doing research to know your options.

        kim

  3. In Nova Scotia its 50%!!!!!!!!!!

    $150,000 downpayment required for a $300,000 farm.

    No wonder they stay on the market for years.

    Better yet, if you do have rooms full of money laying around, the NSFLB will give you massive tax breaks, increadible benefits……. as long as you are already rich. Believe it or not, they are a government funded program designed to help nova scotians start in the farming field and create jobs. ….as long as you are already rich and dont need a job. They they will give you loads of money.

  4. b cehovin says:

    FCC was created to be a last resort of lending to farmers…however now its very difficult for a young farmer to get started, as mentioned above unless you have loads of cash or can get family to sign their life away you will NOT ever get a loan with FCC.. since the agri food industry was always classed as “if you cannot get a real job you work in Agriculture” there is NO future planning into this industry..I have farmed for 33 years and i do not see a lot of my friends off spring acquiring the want to be in this very difficult life sucking industry….your will mortgage your whole life and freedom to have the privilege to produce food..and be at the mercy of your lenders 24/7 as if the job is not as demanding and the markets (unless you have quota) weather/employees/enviromental/ethical etc…..Most of the these lenders have NO idea of what a farm really requires,,.Its not just cashflows …It was mostly families that farmed because it takes a lot of support/dedication/skills to be able to dedicate your whole existence…I find it very sad to see the future of farming left to bankers…

    • Yeah it is a bit sad because most farms are in debt. Some of the new farmers are trying to do it as debt free as possible. However, that is usually more homesteading

      • Great post with great topics and points made!
        However, we are farmers that do not have any debt-our choice- and we do not consider ourselves homesteaders. I think homesteading is more of a lifestyle choice, but still separate from running a farm business, which is what we do.
        Thanks again for an interesting post!

  5. I’m sorry but $500,000 for a small farmers m is not near what you you would have to pay in my area $3,000,000 minimun

  6. How about doing a land share?? We have 10 acres that re not being used AND we are willing to make a deal with those who are young farmers (with building and gardening skills) who want to own a part of the land (2.5 acres) and lease the rest from us. We do not plan to move and even after we die we will be passing our part onto our kids…but in the meantime we live in the beautiful mild Creston BC area…our land has 3 creeks, with the possibility of micro hydro from one that runs all year…gravity mounain spring water that we drink,…fields, hills, trees along the streams.
    We just want the land used (organically), greenhouses could go up, there is already a fenced garden about 30×70) fruit trees and bushes etc. We would allow someone to build there cabin on the part they want to buy and they may pay over a 12 year period….so $80k divided by 12 years with no added interest. Even if a couple wants to do it as a retirement place that would be fine…or one of the couple can work in town (10 ) mins away while the other does the major part of the farming. We have a wonderful 10 month farmers market here as well as 1.5 hours west in Nelson. There is a barn we could share with you.
    OR…don’t pay us anything except some hydro, put up a tiny house, and take care of the land around our house and the garden and do your own things as well. There are lots of land owners like us. We just don’t want anyone who has no experience, is into new age thinking and cannabis (been there done that)…its hard to be a free spirit when the land demands real work. But there is also a lot of reward in being in God’s country, mountains lakes, forests and all that goes with that more peaceful lifestyle. Write me if you want more info or have ideas
    snowpeach@mail.com

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