Earlier this week, USDA announced the start of an exciting new loan program that will better meet the credit needs of small farms of all types, including especially young farmers and those serving local and regional food markets, including urban farmers.
The final rule for the proposed microloan program was published today, and the Farm Service Agency (FSA), which is USDA’s credit lending arm, intends to begin making these smaller loans effective immediately.
NSAC and several member organizations, including the National Young Farmers Coalition, California FarmLink, and others, spearheaded initial efforts to encourage USDA to develop a more streamlined loan program that specifically targets smaller and less-established producers who typically have smaller credit needs. We continue to be big supporters of the FSA credit programs for family farms in general and for beginning farmers and socially disadvantaged farmers in particular. The new microloan program helps fill an additional, important niche within the overall FSA loan portfolio.
We are very pleased with USDA’s responsiveness and with the new lending option. We also continue to pursue further improvements through the farm bill process in Congress — more on that below.
Microloan Program Details
These new microloans will be funded through FSA’s existing Direct Operating Loan program, and will have a maximum loan amount of $35,000, which is much lower than the $300,000 loan cap for regular FSA farm operating loans. These smaller loans are intended to cover smaller purchases, such as seeds, animals, small equipment, or other investments that young and other beginning farmers require to finance their operations.
Farmers will be required to secure these smaller microloans with collateral in the form of farm property worth at least 100 percent of the loan amount. Similar to other FSA loans, a third party pledge of security or co-signer will be accepted to meet these security requirements when necessary.
The new microloan program will feature a simplified and streamlined application process, and will require less paperwork for farmers to fill out and appropriately reflects the smaller loan amount. The microloan application will be available online, which was a recommendation included in NSAC’s comments on the initial rule published last summer. Although FSA agrees that an online application process would be an efficient alternative to the present loan application process, microloan applications cannot at the current time be completed and submitted electronically so therefore must be filed in person at the local FSA office.
In order to be eligible for the new microloan program, a farmer must have sufficient prior experience working on a farm, but borrowers will be given additional flexibility in meeting FSA’s farm management experience requirement. This includes small business experience, participating in a self-directed apprenticeship, or having prior involvement with an agricultural organization, such as 4-H, FFA, farm incubator programs, and community-based farm training organizations. FSA intends to provide additional guidance on how migrant workers can meet the management requirement in order to take into account their prior farm experience.
FSA will not require an itemized cash flow budget for microloan applicants, a previous requirement that has made it difficult for diversified fruit and vegetable growers and community-supported agriculture farmers to participate in FSA lending programs. FSA’s new flexibility in matching production and income loan-making measurement tools to specific types of production and marketing is to be commended.
Ensuring Successful Implementation
There are several measures that will help determine the ultimate success of this new federal credit program, and which NSAC included in our public comments submitted on the initial rule.
1. Training – It is critical that FSA loan officers are provided formal training on the new microloan program and how to make loans and asses the financial risks, projected yields and profitability of non-traditional borrowers, including small, diversified operations selling through direct or alternative marketing channels or using sustainable or organic production practices. FSA intends to provide additional guidance to local and state FSA offices on how to make loans to cover organic and less traditional crop production.
2. Outreach — The extent to which FSA is able to get the word out to potential borrowers who may not be accustomed to or familiar with the services that FSA provides will be another key element in implementing this new loan program successfully. NSAC will be working with our member organizations and FSA to conduct outreach to farmers who may be interested and able to benefit from this new loan program.
3. Evaluation — Finally, it will be necessary for FSA to periodically and regularly evaluate this new credit program in order to assess borrower participation and asses the extent to which it is sufficiently meeting the credit needs of small, beginning, and socially disadvantaged producers, including those who sell into local and regional markets. NSAC will be tracking this information as it becomes available and providing feedback to FSA on program implementation.
Additional Program Changes Needed
There are several provisions that NSAC has recommended be incorporated into the new microloan program, but which FSA cannot adopt until there are statutory changes made in the Farm Bill. These include:
- exempting microloans from counting towards borrower term limits;
- adjusting the limited resource interest rate so that it applies to microloans and is set on a flexible formula basis relative to prevailing interest rates; and
- establishing an intermediary relending program that would allow non-profit organizations and community financing entities who are already involved in microlending to use their expertise to successful implement this new program.
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