If you have a plan for capital improvements that could be made to your farm (especially if your farm once grew tobacco), and you know an interested lender, one of three state-backed loan programs could meet your lender halfway to loan you the needed capital.
Three programs of the Kentucky Agricultural Finance Corporation (KAFC) draw on monies of the Kentucky Agricultural Development Fund (KADF). The KADF was set up when federal tobacco price-support subsidies ended in the mid-2000s to help farmers transition from tobacco into other agricultural products and opportunities.
The KAFC is led by Executive Director Roger Thomas, under whose seven years of leadership the fund’s assets have grown from $20 million to $49 million.
KAFC’s mission is to help beginning farmers, farm families, and agribusinesses obtain the necessary capital to set up, maintain, and expand farm operations. This can include launching agritourism operations on existing farms, or beginning a farm that has an agritourism dimension.
Bill McCloskey, director of financial services, Governor’s Office of Agricultural Policy (GOAP), described three programs available for low-interest loans that might be of special interest to agritourism operators.
Step one happens before anyone approaches the state. The farmer goes to his or her lender, likely one with whom there is already a financing relationship.
Banks, agricultural credit institutions such as Farm Credit, and financial institutions with offices in Kentucky are eligible to lend as KAFC partners, McCloskey said.
The lender reviews the details of your proposal (likely, your business plan or some kind of cost outline). If on this basis they agree to back half of its cost, the lender applies on your behalf to the KAFC to consider loaning the other half of the funds at 2.75 percent interest. (Two percent is for the state; the other 0.75 percent is the lender’s service fee for collecting payments from you and forwarding them to the state.) One benefit of including the KAFC in your financing efforts is obtaining this lower blended interest rate.
KAFC takes a subordinate position to the lender, “which helps incentivize the lender to finance non-traditional agriculture. That could be of special interest to agritourism projects,” McCloskey said. “If the private lender knows they can get half the cost of the project up to our limits, they might be more inclined to participate.”
Decision in six weeks
Now the lender carries the ball, conveying your paperwork to the KAFC Board of Directors. At its monthly meeting, the board votes on the proposed KAFC-partnered loan. A decision typically comes two to six weeks after applying.
Loan limits and eligible categories of expenditures differ among the three programs, as McCloskey described.
● Agricultural Infrastructure Loan Program
The AILP is for capital improvements – acquiring, renovating, and building agricultural structures that enhance the profitability of a farming operation.
In the case of agritourism, McCloskey said, this could include building fences and sidewalks for traffic management, putting up a building for an agritourism operation, or buying equipment that has a primary purpose related to the agritourism function. (The program is not limited to agritourism – this article uses agritourism as an illustration because it first appeared in Agritourism Monthly, a Kentucky Department of Agriculture newsletter targeted to the agritourism industry.)
Projects cannot include operating expenses, livestock, or portable farm equipment, and cannot be used to refinance existing debt. Complete eligibility requirements are at http://agpolicy.ky.gov/finance/Documents/guidelines_ailp.pdf.
If you can document recent tobacco income, your borrowing limits are higher. Loans under this program can total up to $150,000 if the applicant has a history of tobacco production. You document recent tobacco income by showing that you received a Phase II check, had a Tobacco Transition Payment Program contract, or have a current executed contract for tobacco production. If the producer does not have such a tobacco history, $100,000 is the loan limit.