The Farm Service Agency (FSA) guaranteed loan program and Small Business Administration (SBA) loan program are two of the most prevalent government guaranteed loan programs utilized by poultry farmers. But which is the one to choose for your operation? We recently visited with Ben Chandler, poultry lending expert with First Financial Bank, to analyze the pros and cons of each program. This comprehensive guide is your go-to resource to help you make either decision, whether you are looking to construct a new poultry farm or grow your current operation.
FSA Advantages: All the Good Things
“The FSA guaranteed loan program plays a vital role in allowing all farmers access to capital for their agricultural related projects,” Chandler said. “It is especially important for poultry farmers since the program has several advantages.”
Lower Upfront Costs
First off, the financials of FSA really make sense. “The upfront guarantee fee is 1.5% of the guaranteed amount of the loan,” says Chandler. For farmers who are tracking their initial investment, that reduced entry cost could be a game-changer to get them up and running.
Flexible Collateral Requirements
The FSA program allows for a higher loan-to-value ratio than most conventional loans offer. Loan-to-value is simply defined as the total loan amount divided by the total collateral value. As Chandler mentions, “The farmer may be able to pledge collateral to meet the lending institution and FSA loan-to-value requirements, without necessarily injecting 10% or more in the form of cash as required by SBA for new construction projects or farm purchases.” That’s especially appealing for growers who might be” land-rich” but need cash, a fairly common scenario in the agricultural economy where real estate equity can substitute for large down payments.
No Ongoing Fees
What is one of the most appealing elements in FSA financing? “The FSA loan program does not have an ongoing guarantee fee compared to SBA,” says Chandler. “SBA typically has a 55-basis-point guarantee fee that may be included in the borrower’s interest rate.” The difference can mean substantial savings over the life of a loan.
FSA Drawbacks: Knowing the Limitations
Loan Amount Caps
The FSA program has one serious drawback: the maximum loan limit. “The maximum loan limit of $2,343,000, is adjusted annually for inflation, may not meet the full credit needs of today’s poultry farm.” Chandler says. Construction costs have increased substantially over the past few years, especially with the inflation experience coming out of COVID-19, so many of the newer poultry operations surpass that figure.
Contract Requirements
FSA has certain rules about your poultry contract. “The poultry contract must have a minimum term of three years and guarantee a minimum number of flocks per year,” Chandler says. “As a lender, this is not a bad thing. We like seeing this. However, the SBA program does not have this requirement, and some poultry integrators do not offer FSA-eligible contracts.”
Lengthy Approval Process
If you’re ready to begin building, the FSA time table from application to approval may be quite involved. When asked about the loan approval process, Chandler replies: “The approval process can be lengthy, especially for new construction projects.” This extended timetable corresponds to environmental requirements. “These are directly attributed to the FSA’s interpretation of the National Environmental Policy Act requirements and the environmental due diligence process that is handled exclusively by FSA and FSA’s State Environmental Coordinator,” Chandler explains.
SBA Advantages: All the Good Things
Higher Loan Limits
The greatest benefit of the SBA program is an increased loan amount. “The maximum loan amount for SBA financing is $5,000,000,” says Chandler. “As costs have increased coming out of COVID-19, this higher loan limit has helped producers obtain financing for their more costly projects,” he said. For growers starting new construction or large expansions, this extra space can be the difference between living your dream and scaling it down.
Faster Approvals
Agriculture is a time-sensitive business, and the SBA program recognizes that fact. “The approval process can be very quick for the borrower, especially if they are working with a PLP lender,” says Chandler. “SBA grants PLP lenders delegated authority to those lenders to approve loans on behalf of SBA.”
The environmental review also goes much faster. “SBA allows third-party companies to complete the environmental due diligence on every project financed by an SBA loan. The third party tends to complete the environmental assessment much quicker than FSA completes its internal assessment.”
Greater Flexibility
The SBA program is far more flexible in several crucial respects. “The SBA program offers more flexibility with regard to loan terms. There is no collateral age limit which restricts the term of the loan. The term of the loan is set by the lender and is based on the remaining economic life of the collateral offered.” Chandler says. “Also, there is no minimum term requirement on the production contract with the integrator.”
SBA Drawbacks: More Expensive and Stringent Eligibility Requirements
Cash Injection Requirements
The SBA program has a significant hurdle for many farmers: it’s a specific cash requirement. “10% cash injection is required on a start-up project (new poultry farm construction) or a change of ownership transaction (poultry farm purchase),” Chandler says. It’s not just 10% of the purchase price. “This 10% injection is based on the total project cost, which includes all construction or purchase monies, as well as all loan fees and closing costs.” Chandler notes that this can be a serious stumbling block: “Not every producer has the financial means to bring this type of down payment into a project. SBA differentiates between cash and collateral. With farmers, we typically see real estate offered as collateral for a loan since they farm the land. Some also have cash, but it is more common to see real estate.”
Higher Fees
SBA loans are also more expensive than FSA loans in two ways. First, the initial expenses are greater. “The upfront guarantee fees are more expensive than the FSA loan program. The SBA uses a tiered fee schedule that increases with the size of the loan. These fees range from 3% of the guaranteed portion of the loan up to 3.75% of the guaranteed portion of the loan.” Second, there’s that ongoing fee: “The SBA typically charges an ongoing guarantee fee of 55 basis points.” Chandler’s conclusion, “In general, the SBA loan is a more expensive loan.”
The Best Choice for Your Business
Can You Switch Programs?
A question that many farmers have is whether they can switch programs if their needs change. Chandler’s response is simple, “No. The only way to move from one program to another would be for the loan(s) to be refinanced. This is fairly expensive.”
Comparing Total Costs
You must always see the big picture when weighing which program is financially wiser. “It goes back and forth depending on what size loan we’re talking about,” Chandler says. “The SBA cap is $5,000,000 vs. FSA’s maximum loan of $2,343,000 and adjusted annually for inflation. So that the FSA loan means expenses and interest would be cheaper over at least as long a period as the loan.” For poultry farm financing decisions, it means that if your project falls within the bounds of FSA and you meet their contract requirements, then it will cost you less over the long haul. However, suppose your project runs more than $2.34 million, or your integrator does not offer contracts eligible. In that case, the SBA program is now the best you can get with a government guarantee.
It is worth noting that the two programs may be used together. For example, a borrower wishes to work with a lender to finance a $3.5 million poultry farm project. The project is FSA eligible so the lender applies for the maximum FSA loan amount $2,343,000 and finances the remainder with a loan from the SBA. This is very common at First Financial Bank. It does add to the complexity of the process, having to obtain approvals for two governement agencies, but it is worth it in the long-run. That is why it is important to work with a lender who looks out for your best interest, not just the easiest path to approval.
What If You’re Rejected?
A single program’s “no” doesn’t mean the end of the line. “It depends,” Chandler says, on moving from one program to the next. “For instance, FSA requires a minimum of a three-year contract requirement for a specified minimum number of flocks per year. SBA does not have that.”
Preparing Your Application: What You Need To Submit
No matter which program you choose, being prepared will help ensure the process goes smoothly. Chandler offers a detailed list of what you’ll need under both programs:
- Bank loan application
- Letter of Intent from poultry integrator
- Copy of driver’s license
- Current financial statement
- Three years of personal tax returns
- 3 years tax return on owned entities (if applicable)
- Construction or upgrade bids
- Legal property description for financed and/or added collateral
- For farm purchase: three years of tax returns on the seller
Looking Ahead: Policy Changes
Like any government program, FSA, just like SBA, is under policy. Chandler was forthright about upcoming changes: “There are always policy changes that occur in both programs, but we’re not granted information in advance of releases.” This highlights the necessity of working with an experienced lender that remains up-to-date and can advise you if there are any adjustments.
Let’s Get Started
Ready to talk about which program is best for your operation? Contact our poultry loan team and find out how your path to poultry farming success can begin!
