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Kentucky loan program may assist new farmers
Kentucky Correspondent

FRANKFORT, Ky. — The number of farmers entering the business has been declining for years due to a variety of reasons, mostly related to the challenging financial environment associated with the agricultural industry.

To help, the Kentucky Agricultural Finance Corporation (KAFC) has announced the implementation of the Beginning Farmer Loan program to assist those just getting started in farming.

The program was designed not only to provide low-interest loans through participating loan institutions, but also to assist applicants in developing a business plan to ensure success.

The Kentucky Agricultural Development Board (KADB) approved $2 million at its last board meeting for the program and funds will be available to producers meeting eligibility requirements established by KAFC.

Kentucky Gov. Ernie Fletcher sees the program as a way for new producers to have access to money needed to start their businesses successfully.

“By establishing this program, the KADB and KAFC are allowing beginning farmers in the Commonwealth to have the opportunity for a successful future in agriculture and gives producers an easier access to capital,” he said.

The money used by the program and ultimately by participants, is a derivative of funding that comes from the Master Settlement Agreement - or Phase I - funds. KAFC was originally created in 1984 but had been dormant since 1991 until a planning initiative coordinated by the Governor’s Office of Agricultural Policy (GOAP), revitalized the program.

On July 18, 2003 the KADB approved a $20 million funding request from the KAFC to capitalize the lending program which in essence would help provide low interest loans to farmers through a variety of loan and investment programs across the state by partnering with local banks.

The Beginning Farmer Loan program is just one of those implemented by the KAFC to utilize that Phase I money in reinvestment and diversification initiatives as Kentucky uses half of its annual MSA funds for agriculture purposes.

“We have a one-of-a-kind program here which uses that Phase I money to help diversify agriculture,” said Tim Hughes of the Governor’s Office of Agricultural Policy and overseer of the new loan program. “It would be tough for a young farmer to go out and operate in some instances without programs like this.”

One of the participating lenders working with KAFC is Citizens Commerce Nation Bank in Versailles. Michael Duckworth senior vice-president and the agriculture relations officer said each loan is tailor-made to fit the needs of each applicant.

“We still make house calls at our bank, and I like to visit the farm and sit down to discuss what the farmer’s needs are and to guide the process,” said Duckworth. “I see a lot of young farmers excited about getting into the industry. They are willing to learn the economics of the business. We have to have enough vision and long-term planning to see this program through.”

Terms of the program
Farmers can qualify for financing to purchase livestock, equipment, agricultural facilities, permanent working capital and to make a downpayment on real estate or invest in a partnership but loans cannot be used for refinancing.

Beginning farmers are defined as those who have not operated a farm or ranch for more than 10 years, have participated in business operations of a farm for at least three years substantially participates in the operation and does not own a farm or ranch greater than 30 percent of the average farm or ranch size in the county that the operation is located.

Other terms include: the applicant (and spouse, if applicable) must have a combined net worth of less than $250,000 at time of application; applicant’s personal off-farm income is less than $50,000 annually, and total household off-farm income is less than $75,000 annually as evidenced by the past two year’s tax returns.

A borrower will be limited to an outstanding balance of no more than $100,000 in this program. There must be a commitment by a participating lender to work with the borrower to implement the 5-year business plan and to provide additional financing as the borrower becomes eligible.

The participating lender must be a financial institution with offices in Kentucky; KAFC will loan up to $100,000 not to exceed 50 percent of the outstanding debt held by the participating lender on behalf of this applicant at the closing of this loan; no applicant may participate in this program for more than 10 years. The maximum loan term will be 10 years, but may be less than 10 years for certain loans where applicable; initial interest rate will be 2 percent by per annum and will be fixed for the term of the loan.

There is no penalty for early repayment of the loan. The loan must be secured with both fixed assets and the personal guarantee of the borrower. The applicant must submit a five-year business plan showing a reasonable return and an ability to retire the KAFC debt.

The applicant must be a resident of Kentucky; identification and commitment of a Mentor willing to advise the borrower on record keeping and business analysis during the term of the loan; KAFC shall review each application and supporting documentation; and loan approval will be at the discretion of the KAFC board.

For more information, contact Tim Hughes at 502-564-4627.

This farm news was published in the April 19, 2006 issue of Farm World.