Credit and Lending

Invest in Rural Communities


Credit and Lending

Small business owners need access to credit to grow their businesses, but access to credit is more challenging than ever.

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Farming is a profession that relies heavily on credit – not just when a farmer starts their business but at the beginning of every season, when they must pay for their seed, feed, and other inputs. Depending on their business, the farmer may not see return on their investment for many months, until it is time for harvest. Reliable access to credit on good terms is critical to farmer livelihoods. Rural economic downturns and overall bank consolidation has made credit access more challenging for most producers; for young or beginning farmers, farmers of color, and other socially disadvantaged farmers, credit access has long been unreliable.

Commercial banks offer the majority of loans to farmers, but as banks have become more risk-averse, they have become less willing to lend to farmers, particularly those who have fewer assets or who are just starting out. The two other primary sources of farm credit are Farm Credit and the USDA Farm Service Agency (FSA), and much about farm credit is determined in the credit title of the federal farm bill.

To expand the options for available farm loans, state legislatures have developed and funded a variety of farm lending programs, including direct farm loans, Aggie Bonds that offer lower rates to beginning farmers than a commercial farm loan, and other specialized loan and finance programs. Some states have created farm loan guarantee programs backed by small bond issues; local lenders receive up to 85 percent guarantee of principal and interest. Similarly, loan participation programs in some states help low-equity farmers and ranchers obtain farm loans, as the state provides a partial guarantee of repayment by purchasing part of the loan from the local lender.

Finally, beginning during the 1980s farm crisis, a number of farm states created programs to assist farmers who were suddenly struggling with debt due to inflation and a drop in land values, which were unforeseen factors entirely out of their control. Many farmers today are finding themselves in debt for similar reasons; state-financed debt mediation programs can help.

Policy Priorities

  1. Federal: Require the Farm Credit System to place a portion of profits in a community mandate fund for grants and loans to support rural small businesses, mid-tier food system businesses, and young, beginning, or historically underserved farmers and ranchers.
  2. Federal: Improve access to USDA farm loans by eliminating the cap on the number of times a borrower can receive a direct operating or direct farm ownership loan, increasing the microloan limit from $50,000 to $100,000, and revising the beginning farmer definition to include entities composed of non-related individuals. Furthermore, the USDA should stop subsidizing and unfairly propping up industrial livestock farms with guaranteed loans.
  3. Federal: Pass the Small Business Lending Disclosure Act, extending federal Truth in Lending Act (TILA) disclosure requirements to small business loans and credit products to protect the most vulnerable small businesses from predatory lending practices. Small businesses and entrepreneurs are the backbone of the rural economy, and they are too often the target of predatory lenders.
  4. State: Develop or expand Aggie Bonds, guaranteed loans, direct loans, loan participation programs, and similar initiatives.
  5. State: Assist farmers in credit mediation and addressing ongoing debt challenges.
  6. State: Provide affordable access to capital to the smallest businesses, even those with lower credit scores, through allocating more funding to Community Development Financial Institutions.
  7. State: Pass truth in lending laws to regulate online small business lending and discourage predatory lending practices, particularly toward entrepreneurs of color and women.

State Examples

  • Oregon (Stat. Chap. 23 Div. 52) is one of nearly 20 states with an Aggie Bond program.
  • Minnesota’s Farmer-Lender Mediation Program, authorized in 1986, has been extended many times, including during the COVID-19 pandemic (>2019 MN HF 4599).
  • In California (2018 CA SB 1235), legislators enacted a bill that would protect small businesses against predatory lending practices by creating new loan disclosure requirements for commercial loans, including nonbank and online lenders. New York (2020 NY S 5470/A 10118) lawmakers passed similar legislation to establish disclosure requirements for commercial loans provided by traditional and nontraditional lenders, including online lenders, and to establish financial penalties for violations of the new law.