When it comes to Ag loans, what’s collateral, and why does it matter to lenders? It’s all about security and reducing risk.
For someone starting out in farming, an Ag loan can be essential to funding their plans, and collateral is typically part of the process. Many borrowers have some idea what this is, but may have specific questions or need clarification. Bridget Roberts, a Loan Officer for First Financial Bank’s Farm and Ranch Division, has provided some details to help.
What is “collateral”?
A typical definition is “Collateral is a valuable asset that a borrower pledges as security for a loan.” In other words, in exchange for funds to purchase or refinance, the borrower offers an asset or assets to the bank to offset the risk against the loan not being repaid. Collateral is the way banks mitigate risk and secure a loan transaction.
Ultimately, banks are simply accounting for their risk of not getting repaid. Requiring the borrower to “have some skin in the game” with either collateral or a down payment is how they ensure that, should the loan not be paid, they can collect the amount still due. Repaying loans as agreed allows the bank to take those funds and lend them back out, keeping the economic cycle going and supporting the industry. “The focus is on both your business and ours being successful,” states Bridget.
What types of collateral do lenders prefer?
Collateral can include real estate, equipment, livestock, crops, or other assets with a market value. “Land is a great, widely accepted option, if available. But it’s not the only one. Throughout my career, I have tried to match the purpose of the loan to the repayment structure and the type of collateral required. For instance, an operating loan may have the annual crop and/or livestock as collateral, supported by additional collateral to lessen risk,” according to Bridget.
“In my current role at the Farm and Ranch Division, we mainly focus on real estate transactions, so land is often used as the collateral for the purchase of the farm,” says Bridget. “Equipment and livestock are common collateral for other types of farm and ranch loans. Livestock can be used to secure annual operating loans or loans to purchase additional livestock. Equipment loans are typically secured by the equipment being acquired and potentially supported by additional equipment already in place to reduce the amount of down payment required.”
Other types of assets with a market value may also be used as collateral. “The most creative form of collateral I have seen used was silver coins held in a bank vault,” says Bridget. “
Every industry has items unique to its production that might be appropriate for collateral. For example, wine barrels, solar panels, cattle buildings with a composting floor, and land rollers are all industry-specific items that may seem ‘creative’ or unusual to those outside your industry. Still, they may be a useful asset for collateral for your loan.”
