Beyond Interest Rates: What Every Agribusiness Owner Should Know About Business and Farm Loans

When buying a car or tractor, you probably wouldn't choose based on price alone—you’d also consider fuel efficiency, maintenance costs, and reliability. The same thinking applies to choosing the right agribusiness loan (sometimes referred to informally as an “ag loan”) or farm loan.

While many people focus on interest rates when looking at loans, understanding all the parts of a loan makes a big difference in how much you’ll pay and for how long. For example, longer repayment terms can leave you with more money to invest in growing your business each month, while loans with shorter terms may have higher payments but can help you pay off debt faster. Review your business’s goals and projections to help you decide which options best suit your needs.

Here, we look at key components of a business loan. At the end, we provide two examples that use the same interest rate but with variations in the down payment, term, and fees so that you can see how these impact loan affordability.

Important interest rate considerations

Interest rates tell you how much you'll pay to borrow money—sort of like a rental fee for using the lender's money. There are two main types of interest rates:

• Fixed rates stay the same until the money you borrowed is paid back in full. Your monthly payments stay the same, too, which makes it easier to budget.

  
  

• Adjustable rates can change during the loan period. Adjustable rate loans can sometimes provide lower interest rates at the beginning of your loan term than fixed rate loans, but, if rates go up, your monthly payment will, too.

  
  

Tip: When interest rates are low, a fixed rate will often work in favor of the borrower, especially for loans that have longer repayment terms (more than five years). When interest rates are high, a variable rate loan may be worth considering, because these loans typically have a lower initial rate and you would benefit if rates go down in the future.

Choosing the right loan term

A loan’s term is the amount of time that you have to repay a loan. Terms vary significantly depending on the lender and the use or type of loan. The term can also make a big difference in the amount you’ll pay every period.

Usually, a longer payment term makes a monthly payment lower and, for most businesses, easier to pay. However, because longer terms also mean that you may pay more interest over time, some businesses choose loan terms that help them pay off the loan faster. If there’s no prepayment penalty, you can also make extra payments toward the principal to pay it off faster, when your cash flow supports that.

Tip: Watch out for a “balloon” term. This means that a loan is calculated in a way that can make payments lower but when the term ends, there will still be a principal balance that you’ll be required to either pay off in full, at once, or to refinance.

Understanding fees and extra charges

Some loans don’t have additional fees and charges attached to them, but many do. Knowing how much these cost is important—and for many borrowers, so is knowing if you have to pay them as you apply, or before you close the loan, or if they can be “rolled” into the loan. In that case, the fees are added to the loan principal (the actual amount that you borrow) and then a fraction of the fees is paid off with every loan payment.

Tip: Read all paperwork carefully to spot extra costs. A loan with a 5% interest rate but no fees might be better than a 4.5% loan with high fees. Types of fees can include application fees, origination fees, and/or prepayment penalties for paying off the loan early.

The down payment

Lenders prefer—and often require—that borrowers have a down payment to put toward a loan. This lowers the amount of money that the lender puts at risk while also ensuring that borrowers have a financial stake in the loan. The size of the required down payment can make a big difference in whether or not you can afford the loan.

Tip: When researching loan options, consider your timing when it comes to making a large down payment. For example, if you have a produce farm, making a large down payment right before planting season might strain your operating cash when you need it most.

What to know about collateral

For new businesses, certain types of loans, or specific lenders, you may be asked to pledge collateral—something you own of value that a lender can claim if you don’t pay your loan as agreed. For example, equipment loans might use the equipment itself as collateral; real estate loans (mortgages) and farm land loans typically use the land and/or buildings as collateral; and operating loans might accept something like a car as collateral.

Tip: Be careful about using your home or family farmland as collateral for anything other than a mortgage—if a worst-case scenario became reality and you couldn’t repay your loan as promised, you could be at risk of losing your property.

Repayment flexibility

Agricultural businesses often have seasonal income and some lenders can work with you to leverage your cycles. A crop farmer might arrange to make larger payments after harvest and smaller ones during the growing season, for example. Another option is a bridge loan, which can help you secure a lower-interest loan with interest-only payments, which can be helpful if, for example, you receive a grant for a project but need financing to meet the terms before the grant funding can be paid out.

Tip: Talk to a lender about your business cycles to see if there are loans that can meet your needs. Lenders, especially those who focus on agricultural businesses, may have some flexible options.

The bigger picture: Examples that show how interest is only one consideration

Let’s say you're buying a piece of equipment for $100,000 with a 5% fixed interest rate:

• A 5-year loan with a 20% down payment ($20,000) means an $80,000 loan, plus loan fees of $2,400 (3%) in this example. If interest compounds weekly, you’ll make 60 monthly payments of about $1,555.

  
  

• A 10-year loan with a 10% down payment ($10,000) means a $90,000 loan, plus loan fees of $3,150 (3.5%) in this example. If interest compounds monthly, you’ll make 120 payments of about $988.

As you can see, the fixed interest rate of 5% is the same for both examples, but the down payments, terms, fees, and compounding rates vary. As a result, your monthly payment would be very different for these two loans.

HVADC offers farm loans and agribusiness financing

Remember, the right loan isn't just about getting the lowest interest rate—it's about finding terms that work with your agribusiness cycle.

HVADC can help through the Agribusiness Loan Fund. The fund offers a range of loans tailored to the specific needs of farms and agribusinesses in New York’s Hudson Valley region, including working capital, equipment purchases, real estate, leasehold improvements, business expansion, and bridge/gap funding.

When you’re ready to explore funding options, reach out to learn more about how HVADC can help.