How the Economic Climate Affects the Approval of Farm Loans

Farm loans are not technically different from any other type of loan on the market. This means they are subject to national economic trends just like mortgages or car loans. One primary difference in farm loans, however, is the degree to which the federal government takes an interest in farming operations. The federal government has historically been very involved in funding farmers because of the nation's reliance on their crop for daily needs. Further, the United States exports a substantial amount of crops, greatly affecting the country's trade ratios, or how much we import versus how much we export. Because the government has a special interest in farmers, they may be able to get loans even in a bad economic climate.

Attitude toward Risk

The national attitude toward risk mostly affects private lenders. When the country is in a time of economic prosperity, lenders are typically very hungry for risk. They are willing to extend loans to under-qualified businesses and persons because the chance of making money on the loan is very high. In a recession, the chance of making money on a risky loan is very low. This means private lenders will pull back and seek out safer loan opportunities. They will also charge higher interest rates on loans to make up for the money they lost in the market downturn. 

Number of Loans Available

Lenders have less cash to hand out in a recession. Loans they previously extended have gone into default. The collateral they accepted for these loans originally has also depreciated in value. Financial institutions are typically heavily-invested in the stock market as well, adding to their losses during a recession. All of these factors combined mean banks and lenders have lost a lot of money in response to the economic downturn. When lenders are cash poor, there are less loans to distribute to small businesses like farms. Fewer loans will get sourced, and fewer farmers will have access to the financing needed to either start or expand operations. 

Government Incentives

The federal government will typically attempt to overcome these negative factors to stimulate the number of loans going to farmers during an economic down turn. Specifically, those farmers growing crops the government needs for its projects or deems important to the financial health of the country will receive a good opportunity for federally guaranteed loans. A federal guarantee means a private lender can seek reimbursement from the government in the case of a loan default. This will make lenders more likely to approve your farm loan and also more likely to offer you a good interest rate.

In a bad economic climate, the government will typically lower the standards it would typically have in order to guarantee a loan. For example, the USDA Farm Service Agency will guarantee loans with a low down payment or higher than average limits. Further, new farmers and young farmers may receive the opportunity to get a loan they would not otherwise financially qualify for. Ask your lender about federal loan incentives in order to get faster approval for your farm loan.