How to Fund Your Farm in Canada – Working with Lending Institutions

Working with lending institutions can be an appealing prospect when trying to raise money for your farm, but there are a few things you should know before you start the application process.

Lenders require proof that you’ll be able to repay the money you borrow with interest. Ways to prove this include a sound business plan, sensible financial documents, a good credit score, a reliable stream of income (such as an off-farm job), and a plan for what will happen if you can’t pay.

For help developing the documents you need to work with lending institutions, check out our Business Resources page. Or, sign up for our Business Bootcamp here.

It’s important to know that even if you meet all the criteria outlined for a loan, you still might not get it. It depends on the lending institution. Often, working with an institution that has experience working with farmers will offer you more options and they will understand the particular cash-flow rhythms that can come with working in agriculture. 

Are You Ready for This? 

It’s also a good idea to do a personal assessment. Ask yourself: What is your risk tolerance? What are your financial goals? Is now the right time? 

If you need some help with this, check out BDC’s Self Assessment Tool to determine your entrepreneurial traits, concerns, motivations, aptitudes, and attitudes. 

For funding options through non-traditional means, check out our How to Fund Your Farm in Canada – Non-Traditional Options blog here. 

If your main funding barrier is land, head over to our Land Access page for ideas and tools to help you access land. 

*Please note that the following information is provided to give perspective and inspiration for funding avenues, and that when considering how these options could be applied to your individual situation, nothing beats the advice of a trained professional. Consider involving a business developer, a farm accountant and a lawyer for advice before entering into any legal agreements.

Funding Options through Lending Institutions

The following is a collection of possible funding options through working with lending institutions along with stories from real farmers describing their experiences working with lending institutions. These options include:

• Grants
• Loans
• Credit Cards and Lines of Credit

You’ll likely end up using a combination of many of these funding approaches to get your farm started and to expand once you’ve been in business for a few years.

As your business expands, remember that debt can be a tool. Getting a small loan to increase your overall revenue can be a great decision. However, be wary of biting off more than you can chew – this is where good cash flow planning and financial management are keys to your farm’s success.

Have you minimized your costs as much as you can? Ask yourself:

• What does your farm absolutely need in order to run?
  • Categorize your early expenses into these categories:
    • Must have – the farm cannot operate without it
    • It’d make things easier, but I can do without it
    • It’d be nice, but it’s not necessary
• Can you rent instead of purchasing? (This goes for land, equipment, tools…)
• Can you borrow instead of purchasing?
• Can you buy it used? (You may need to be a handy mechanic or know someone who is.)
• Is someone willing to give it to you for free or in exchange for something (labour or your product)?

Avoid using your credit card to make large farm purchases if you can! Credit cards are an expensive form of debt due to their high interest rates. Research the interest rates of a line-of-credit or a microloan, and compare that with your credit card interest rate.

Grants

There are lots of grants out there for farmers in Canada. However, they are often project specific. For an in-depth look at How to Apply for Farm Grants in Canada, head over to Young Agrarians’ blog post all about it!

It takes work to find grants that fit your farm’s needs. Be ready to get creative! For example, a grant that provides funding to fence off wetland areas for conservation purposes may simultaneously improve your grazing infrastructure, and therefore help fund your farm infrastructure needs. Keep in mind that many conservation-based grants require you to have an Environmental Farm Plan or to be in the process of developing one. Some local associations and organizations may be able to help you through the process. To find the EFP-administering association in your province, check out this interactive map.

Get ready to do a lot of recordkeeping, as many grants require you to report on what you did with the money. Also, remember that grants won’t necessarily give you 100% of the funding needed to complete the project. Some grants will cover only a percentage of the full cost of the project so you will need to secure the remaining funds elsewhere or use savings.

Many grants work on a reimbursement framework, meaning you’ll have to cover the expenses first and the granting body will pay you back after. This means you’ll have to identify how you’ll fund the project before the grant pays you back. Every grant is different, so you may need to prove that you can complete the project with or without the grant in order to qualify.

Head over to the Business Benefits Finder to look for grants that might fit your operation.

Anna’s Story

Anna Hunter wishes she had started applying for grants earlier. “The applications seem fairly scary, I think, when you start out,” Anna explains, “but, almost all these large government grants give you application guides. This sounds very obvious, but if you look at the application guide and you see what they’re asking for and then you frame the things that they’re looking for in terms of your business and put that as your answer, that’s all they want.”

Hear about her experience with grant writing in this video and get some great tips about how to make grant writing easier.

Benefits:

• Funding to cover specific projects
• On extremely rare occasions, you can find grants that will provide money, no reporting required
• Granting organizations often recognize systemic barriers to success that certain communities have faced, offering funding to groups that have been marginalized or oppressed
• Grants that support the adoption of new technology, sustainable practices, or varietals encourage and enable you to be on the cutting edge of your sector
• If you’re interested in research, grants help support your endeavours and allow you to contribute to ongoing innovation in agriculture

Challenges:

• Good record keeping is required, which takes time and effort
• Might not provide 100% of funding required to complete the project
• Might require you to spend the money first, then submit receipts for reimbursement
• Application criteria can be specific and narrow
• Use of granted funds is heavily restricted

Loans

There are two main types of loans: short term loans and long term loans. Short term loans are loans that will be paid in full within 18 months and are generally used for operating expenses. Long term loans are repaid in 18 months or more and are generally used for purchasing capital assets (equipment, buildings, land).

When considering taking out a loan, consider what the payback term will be, and how much you will need to pay every month in order to cover the amount you’ve borrowed as well as the interest. (Check out this FCC online loan calculator.) Can you afford that amount even in the lean months? This is where you’ll need to look at your cash flow projections to see if you can reliably cover the cost of your loan repayments.

Because revenue in agricultural enterprises can be unreliable, it helps to work with an institution that has worked with farmers in the past. Some lenders will work with you to defer your loan repayments until after first harvest, or have flexible repayment plans.

Know that most agricultural lenders will have a “norm” they are looking for. If your business doesn’t fit into the norm, working with them can be a challenge. A good plan can help.

Read about Nova Scotian farmers Shannon and Bryan of Broadfork Farm and their journey to funding when traditional lenders wouldn’t approve their loan applications.

Qualifying for a Loan

The major hurdle for most folks is qualifying for a loan in the first place. Remember, lenders will likely need a guarantee that you’ll be able to repay the money you borrowed. To qualify, you’ll need to provide either a capital asset (building, land, equipment) that you can use as collateral against the loan, or have a cosigner who has a capital asset and is willing to use it as collateral. 

Things you need to qualify for a loan: 

• A good to excellent personal credit score – different lenders may have different thresholds but at least 600 would likely be necessary
• Down payment of 20-30% of the total loan amount
• Collateral in the form of capital assets, typically non-depreciable assets (buildings, land, cash)
• Previous business financial history or projections for the first 5 years in business (balance sheet, income statement)
• Credit statements
• Net worth statement or equity contributions (how much you have personally spent on the business)
• Estate plans
• Proof of insurance
• Upcoming major financial commitments (tuition, divorce, marriage, relocation of self or relative, purchase of property, major medical procedures, etc.)
• Experience working on the type of farm you are starting
• Education in the production style of your proposed farm

Having farming experience also gives lenders confidence that your farm enterprise won’t fail; this is the “character” part of the lending process. Even if you have all these things, you might not qualify. It all depends on the lender. 

Co-signing on a loan is when someone else agrees to provide the capital asset to levy against the loan. This is a way to move forward, but be aware that if you’re not able to make your loan payments, you’ll be seriously jeopardizing your co-signer. For instance, if relatives co-signed with you on a loan and used their house as collateral and you defaulted on the loan, they could lose their house. Serious stuff, proceed with caution and clarity.

Government Loans

Government-Backed Loans are generally provided by the federal government and administered through lending institutions. They were created to increase farmers’ eligibility for agricultural loans through traditional lenders, often at much lower interest rates than other types of loans. 

 Ask your lenders if they facilitate the following government loans:

Canadian Agricultural Loans Act (CALA): A program run through the federal government and administered through lending institutions, that guarantees repayment of 95% of a net loss on an eligible loan. While not a loan in and of itself, the CALA works to increase farmers’ eligibility for agricultural loans through traditional lenders. Start-ups, part-time farmers, existing farmers, and agricultural cooperatives all qualify.  The program has suffered from issues that have limited its uptake by the major lenders so you may find that your lender is not fully familiar with CALA backed loans.

Advance Payments Program (APP): A program run through the federal government that provides cash advancements to agricultural producers across Canada. Interest rates on the first $250,000 are 0%, and you can borrow up to $I million with the additional amount charged at the prime rate. Administration fees will apply as well. Repayment is only required when the crop is marketed, with terms of 18 to 24 months depending on what you are producing. You may be asked to have crop insurance or be enrolled in Agristability.

Commodity Loan Program (CLP): Only available to agricultural producers in Ontario. This loan can only be used for operating expenses related to crop inputs up to a maximum of $750,000 at prime rate. This loan is medium term, with a maximum repayment schedule of 22 months.

Loans from Banks and Lending Institutions

What’s the difference between a bank and a lending institution? Essentially, a bank is backed by a government authority, which means they must follow strict regulations when it comes to lending. Some banks may have agricultural lending teams which specialize in farm-related loans. Whether or not a bank has an ag lending team may depend on the region. Even if there is an agriculture lending division you can not necessarily rely on them to have in depth knowledge of the agriculture sector so expect to educate the staff about your business model and risk mitigation strategies specific to agriculture.

The “Big Five” Canadian Banks are:

• Royal Bank Canada (RBC)
• Toronto-Dominion Bank (TD)
• Bank of Montreal (BMO)
• Canadian Imperial Bank of Commerce (CIBC)
• Bank of Nova Scotia (ScotiaBank)
• Honourable Mention: National Bank of Canada (National Bank)

Lending institutions are not necessarily backed with the same authority as banks, and tend to specialize in one area of lending. Examples of lending institutions include credit unions, mortgage companies, savings and loan companies, and even online lenders. Lending institutions will typically have different rates, credit criteria, support options, locations, and online functionality than the larger banks. When choosing an institution to do business with that is safe and transparent, it’s good to verify that it is regulated through the Office of the Superintendent of Financial Institutions (OSFI) or affiliated with licensed institutions.

Lydia’s Story

Lydia Carpenter’s farm, Luna Field Farm, has been in business for 14-15 years, raising cattle, sheep, pigs, and chickens on pasture using planned grazing management. Lydia and Wian purchased their first piece of land after renting for 7 years using a Vendor Take Back Mortgage, which is a privately-organized financial agreement between landowner and land purchaser which doesn’t involve the bank. Using a Stocker Loan, they were able to purchase cattle using the same cattle they purchased as security against the loan. Now, they have a traditional mortgage on their second piece of land and use loans from banks and agricultural lending institutions to fund cattle and equipment purchases.

“We use MASC, which is the Manitoba Ag Services Corp. When we did our Stocker Loans, we would do it with them. Then, when we would do debt consolidation, it was with them. When we bought land, it was them, as well. It’s often the same one or two people in the office that we use. So, they know us, they know our farm, they know that we’re good on our payments. We keep our net worth statements and our projections up-to-date… It’s an on-going relationship. We’re just sort of rolling over – the strategy is that we’re using that money instead of our own and they understand that and as long as we are able to pay it, and as long as we have the asset for the security, it’s fine,” Lydia says.

Hear more about Lydia’s story:

Benefits:

• Access to funds for large purchases
• Ability to afford items that help expand your business or add an enterprise
• Ability to afford machinery that makes work more efficient and reduces labour costs

Challenges:

• Can be very difficult to qualify for a loan, especially if you don’t have large capital assets yet
• Repayment schedules can sometimes be aggressive or aren’t in line with the rhythm of an agricultural business
• Make sure you can stick to the repayment schedule. Communicate any difficulties to your lender or you may forfeit the capital asset you placed as collateral and damage your credit history

Credit Cards and Line of Credit

Credit accounts provide easy access to money to fund your farm, but their high interest rates mean that you will pay much more in the long run. Credit cards can be a quick way to cash flow operating expenses, but be careful as their interest rates can range between 20-30%. Lines of credit will have lower interest rates than credit cards, and still offer the flexibility by allowing you to borrow money as you need it. Be careful not to borrow more than you can reasonably repay. The longer you carry the debt, the more expensive it is and can become harder to pay off. Good cash flow planning will support you to reduce your dependance on expensive forms of flexible money.

*Pro tip* When prioritizing repayment of different types of debt (e.g. credit cards, loans), always aim to pay the debt with the highest interest rate first (most of the time, this will be credit cards). This will save you money in the long run and help you pay down your other debts faster.

*Another pro tip* If you have debt in multiple places including a credit card, you may be able to consolidate your debt into an account with lower interest rates. This means that you can move your expensive credit card debt into a line of credit or a loan (like a Stocker Loan) to decrease the overall interest rate, sometimes quite substantially. The downside is that your credit score may take a hit for a little while after doing this.

Credit Card
Credit cards typically have incredibly high interest rates when compared with other lending options; they commonly have an interest rate of 21.95% or higher. You may be able to secure a low interest credit card option if you are willing to pay an annual fee. Offers change often so research what credit cards may be the best option for your needs through Rate Hub.

Paying down credit cards can be particularly tricky because the minimum monthly payment suggested by the lending institution mostly covers the interest portion of the amount owed, with very little going to the actual debt. Therefore, if you only ever paid the minimum amount each month, you will take a very long and expensive time to pay down your debt. Credit cards, however, can give you access to money very quickly, and there are many options to choose from. Credit cards are an option for folks who don’t meet the requirements for traditional financing. If you choose to use a credit card to finance your business you can use a debt calculator to establish a monthly payment that will pay down the debt within a reasonable time frame.

Keep in mind, however, that some vendors of large items such as vehicles may not accept credit cards as payment. They may, however, offer their own financing options.

Line of Credit
A Line of Credit is a flexible, revolving loan that allows you to borrow money up to a pre-set limit, repay it, and borrow again without reapplying. Unlike a lump-sum loan, you only pay interest on the amount actually borrowed. Interest rates on lines of credit are typically lower than credit card interest rates, so they can be a more affordable and flexible option.

Lines of credit may come with additional fees if they are through institutions other than the institution you already bank with. Also, like credit cards, the minimum monthly payment is typically just enough to cover the interest on your debt (or a bit more), and may not reduce your balance owing by much. Plan to pay more than the minimum payment each month to pay down what you owe, so keep that in mind before going overboard. Only borrow what you can afford to repay.

Benefits:

• Funding when all else fails
• Helps to even out payments on expenses over a longer period of time, although you will pay more in interest
• Quick and accessible
• Ability to make online purchases

Challenges:

• Extremely high interest rates. For credit cards, the interest rates can be as high as 20-30%
• It’s easy to accrue a huge amount of debt this way if you’re not careful
• Carrying a high balance on your credit card from month to month can negatively affect your credit score
• The longer you carry the debt, the harder it is to pay off compared with fixed repayment schedules

Other Options

These aren’t the only options for agricultural funding in Canada. For non-traditional funding options, check out our How to Fund Your Farm in Canada – Non-Traditional Options blog. Most folks will use a wide variety of funding options and work-arounds to fund their farms. It’s a tricky road, but it is possible!