Financing is a critical part of running any farm. But with so many options, from credit lines to traditional loans, it can be challenging to figure out which is best for your needs. In particular, many farmers aren’t sure how an agriculture line of credit differs from a standard agricultural loan (often called a farmer loans or farm loan).

Understanding the difference is key to effectively managing your farm’s cash flow. Our blog will explain what an “agriculture line of credit” is, the difference between it and typical agricultural loans, and when each option makes sense.

Whether it’s planting next season’s crops or buying new equipment, let’s dive in!

What Is an Agriculture Line of Credit?

An agriculture line of credit is a revolving credit account designed for farmers and ranchers. It works much like a credit card for your farm: you have a maximum credit limit, and you can borrow from it as needed, repay the funds, and borrow again, all without having to reapply for a new loan each time.

In other words, it provides ongoing access to funds up to a set limit, giving you flexibility for covering short-term expenses and working capital needs. You only pay interest on the amount you use from the line, not the total credit available.

What Is an Agricultural Loan?

An agricultural loan typically refers to a more traditional term loan for farm purposes. Unlike a line of credit, which is revolving, an ag loan provides a one-time lump sum of money that you borrow up front and then repay over a fixed term in regular installments. You receive all the funds once when the loan is issued, and then you make monthly payments according to a set schedule until the loan is paid off.

These loans often have fixed or variable interest rates, and a predetermined repayment period such as 5, 10, 20, or even 30 years, depending on the loan type.

Key Differences: Farm Line of Credit vs. Agricultural Loan

Now that we’ve defined both financing options, let’s compare an agriculture line of credit and an agricultural loan directly. Both are valuable tools, but serve different purposes and operate in distinct ways. Here are the key differences between a farm line of credit and a traditional ag loan:

Access to Funds: An agriculture line of credit revolving; you can borrow, repay, and borrow again up to your credit limit as needed. In contrast, an ag loan gives you a lump sum all at once, and once you’ve used it, you can’t draw more without a new loan. The line of credit acts like a reusable pool of money, whereas a loan is a one-time cash infusion.
Use of Funds: Lines of credit are primarily intended for short-term or seasonal needs, such as operating expenses, inputs, or other recurring yearly costs. Agricultural loans are generally suited for long-term investments, buying land, equipment, or funding projects that will last many years. Think of it this way: use a line of credit to plant and harvest; use a term loan to expand and improve your farm.
Repayment Terms: With a loan, you have a fixed repayment schedule that amortizes the debt over a set period. You pay interest on the entire loan amount from day one. With a line of credit, you have more flexible repayment, you might only pay interest monthly, and you can repay principal when it suits your cash flow. Significantly, you only incur interest on the amount you borrowed from the line, not the total credit limit. However, lines of credit often come with variable interest rates that can change over time, whereas many term loans offer fixed rates that lock in your cost.
Duration and Renewal: A typical farm operating line of credit might be set up for one year, after which it must be renewed or refinanced for the following year’s needs. Some specialized lines of credit have multi-year draw periods. For example, Janus Ag Finance’s line of credit offers a 10-year draw period before conversion to a term loan. On the other hand, traditional loans have a defined term from the start, e.g., a 5-year equipment loan or a 30-year land loan, and don’t require annual renewal; you know the timeline to pay them off from the beginning.
Collateral and Security: Both lines of credit and loans usually require collateral in farm finance, but their use can differ. An operating line of credit might be secured by expected crop/livestock inventory or farm real estate equity. A term loan is usually secured by the asset you’re purchasing or by real estate. One notable difference is that with some operating lines, only real estate is used as collateral, not your crops or equipment, leaving those other assets free for other financing if needed. Failing to repay any loan or line can put the collateral at risk, so it’s important to borrow wisely.

Pros and Cons

Agriculture line of credit

Seasonal Flexibility

A line of credit provides financial flexibility during seasons of fluctuating cash flow. You can draw funds during planting or when expenses spike, and then pay down the line after harvest or

Pay Interest Only on What You Use

With a revolving credit line, you’re charged interest only on the money you’ve actually borrowed, not the total credit available.

No Need to Repeatedly Apply

Once your line of credit is set up, you can reuse it over and over without the hassle of applying for a new loan each time you need funds.

Improves Cash Flow Management

Because you can borrow in increments as small or large as needed, a line of credit is a handy tool for smoothing out cash flow.

Periodic Renewal Requirements

Most operating lines of credit are not open-ended forever; they typically require periodic renewal or review, often on an annual basis.

Lower Borrowing Limits

Lines of credit often come with lower borrowing limits than a long-term loan might.

Discipline Required

With great flexibility comes great responsibility. It can be tempting to treat an open line of credit like extra income and keep borrowing against it.

Agricultural Loans

Lower Interest Rates and Cost

Agricultural term loans often have lower interest rates compared to lines of credit because the loan is secured, and lenders can offer more favorable rates.

Predictable, Structured Payments

With a term loan, you usually get a fixed repayment schedule, which means you know your payment amount and how many payments you’ll make until it’s paid off.

Enables Major Investments

A considerable benefit of ag loans is that they allow farmers to make large, strategic investments in their business that would likely be impossible to fund out-of-pocket.

No Need for Immediate Full Repayment

A long-term loan doesn’t require you to pay it all back quickly; you can repay gradually over the agreed term.

Less Flexibility

Once you take out a loan, you’re locked into the payment schedule and amount. You can’t easily increase the loan if you underestimated your need, and you can’t reuse funds you’ve repaid without applying for a whole new loan.

Collateral and Down Payments

Most ag loans will require collateral, and meeting these requirements can be a hurdle for some farmers, especially beginning farmers who might not yet have significant assets.

Possible Prepayment Penalties

Certain loans include penalties for paying off the loan early, a prepayment penalty would discourage you from refinancing or closing out the loan early if you suddenly have the ability to pay it off.

Long-Term Commitment

Taking on a long-term loan is a big commitment. You are obligating a portion of your farm’s future earnings to debt service.

Choosing the Right Option for Your Farm

Navigating farm financing can be complex, but you don’t have to do it alone. Working with the right ag lender makes all the difference. At Janus Ag Finance, we pride ourselves on being a trusted partner for farmers, offering a flexible agriculture line of credit to competitive agricultural loans for land, equipment, and more. With over 30 years of experience, our team of expert ag lenders understands your challenges and can craft solutions that fit your operation’s needs.

Get started with your line of credit today!

Agriculture Line of Credit: What is the Difference from Regular Agriculture Loans?