FSA loans - that is government-backed loans from the U.S. Farm Service Agency - provide much needed alternative avenues of financing for farmers and ranchers to buy or expand their acreage; pass a farm or ranch to the next generation of their family; or fund operations of their business. The Socially Disadvantaged Loan Program takes these FSA loans to defined groups of women and minorities. But there are dangers or challenges associated with FSA loans as well. The following will help you understand how the FSA program works for the socially disadvantaged and what to watch out for.
What Is the FSA Program?
For FSA loans in general, the Farm Service Agency approved lenders to offer loans and backs about 90 percent of the loans’ value. This reduces the lenders’ risk and allows them to offer financing to farmers and ranchers who might not otherwise qualify. Each year, a portion of the funds dedicated to backing these FSA loans is set aside for loans to socially disadvantaged farmers and ranchers.
The SDA portion of the Farm Service Agency loan program is only for farmers and ranchers who belong to a narrowly defined group of women and minorities. To qualify for the SDA program you must be one of the following: female, African American, American Indian, Alaskan Native, Hispanic, Asian American or Pacific Islander. If you obtain FSA loans under the SDA program but are not in one of these groups, you financing could be in jeopardy.
Loan Use Dangers
There is an array of uses for FSA loans that also extend to the socially disadvantaged loans. These include FO, or Farm Ownership, loans that you can use to buy land, add to your acreage or help in the passing of your property to the next generation of your family if you are retiring. OL, or Farm Operating Loans, can be used such varied needs as seed, fuel, training and refinancing. But while the options for using the loans are many, they are limited.
With such specific use requirements, the danger is in using the loan funds for any other purpose. Such action can put your financing at risk.
Loan Term Dangers
FSA loans for socially disadvantaged farmers and ranchers have specific limits on loan-to-value ratios, payout terms and the down payment.
FSA loans can only be for 45 percent of the total loan amount needed. You must still provide 50 percent of the money needed for your purchase or project and that can mean the danger of additional debt. You also must come up with a 5 percent down payment for the loan amount. Loans for farm operations must be paid back in seven years, which can pose a challenge as well.
FSA loans offer no protection from the market risks all farmers and ranchers face when borrowing. If you have a bad year, you’re still expected to pay. While the loans are government-backed, that protects the lender if you can’t pay. You are still in danger of default with FSA loans if you can’t meet your obligations.