Farm Loan Affordability: It’s Not Just the Interest Rate

When taking on a farm loan, the first thing most borrowers focus on is the interest rate. And yes, a competitive rate matters.

Consider a 5% vs. 4% interest rate on a $500,000 farmland loan with a 30-year term. The annual payment at the lower rate saves a producer about $3,800 a year ($29,121 compared to $32,921). Over the life of the loan, that adds up to roughly $110,000!

While the interest rate is an important aspect of borrowing money, it’s not the only factor to consider. Agricultural producers also need to consider the structure of their debt. Unlike other businesses that can rely on cash coming in and cash going out regularly, income and expenses on a farm or ranch don’t always align. Read on to learn more about the other factors that can impact cash flow and loan affordability. 

Farm Loan Amortization

Farm loan amortization refers to the process of gradually paying off a farm loan over time through regular payments. The longer the repayment period, the lower the individual payments. Say the interest rate on that $500,000 farmland loan is 5%. Amortized over 20 years, loan payments equate to $40,378 annually. A 30-year loan, by comparison, reduces the annual payments by $7,457 to $32,921.

A longer-term loan that can be paid off early without penalty makes sense for some ag producers. During challenging years, a producer might need a lower payment to ease cash flow needs and help retain working capital. In more profitable years, a producer can pay down the loan, effectively shortening the amortization period. However, it’s always wise to talk to your lender and other advisors about how to best use profits.

Farm Loan Payment Schedules

Farm loan payment schedules outline when and how a producer is expected to make loan payments. Due to the seasonal and sometimes unpredictable nature of agricultural income, a monthly payment schedule may not always work with the outflow and inflow of cash, so be sure to ask your lender if other payment terms are offered. Depending on the lender, the type of loan and the needs of your operation, you may have an option to pay monthly, quarterly, semi-annually or annually. 

Debt service is a major source of cash outflow for many farm businesses. Whether you are weighing a farmland loan, an equipment loan or an operating line of credit, a lender will want to know how the additional debt impacts cash flow. And while the right debt structure is important to managing a cash flow budget, it isn’t the only factor.

Alternative Cash Flow Strategies

A farmland purchase, for example, might not cash flow in the short term, but the rest of an operation could subsidize the land purchase. Some alternative cash flow strategies to consider are:

• Sell underperforming or underutilized assets on the farm to increase cash flow.
• Evaluate other ways to manage agricultural machinery expenses – leasing vs. purchasing.
• Outsource tasks to others that they can do for less so you can focus on areas of your operation that could improve profitability.
• Bring in additional income from off-farm jobs or side hustles.

On the flip side, a producer may need to reduce costs or delay purchases to decrease the cash flowing out of their operation. Honing business negotiation skills, reducing family living, improving feed management and collaborating on field work, machinery and labor are just a few ways to reduce costs. 

The Bottom Line

Yes, interest rate matters when considering farm loan affordability. But how a loan is structured — from the term to the timing of payments — can make or break an operation’s cash flow.

The most successful producers aren’t just chasing the lowest rate. They’re building financial strategies that flex with the farm, adapt to the seasons, and support long-term success. It’s important that producers choose a lender that understands agriculture and can work with them to structure debt to meet their operation’s cash flow needs.