FSA loans can assist beginning farmers and ranchers in financing the purchase or initial costs of managing a farm. They are often financed at very low rates and provide extended payment terms to keep costs down. Even though the loans are comparatively good deals on the general market, they are not without risks of their own.
Loss of Asset in Default
The biggest risk of any secured loan is the loss of asset in default. These agricultural loans are secured by the farm or ranch itself, meaning this is the collateral put at risk when the loan is signed. Most farmers and ranchers rely solely on the land for income.
When a borrower defaults on a federal loan, the loan has a senior priority. This means all other loans will be set aside while the federal government steps in and recoups its losses. If you have a bad year and cannot make your federal loan payments, you will not be given much time or many options when the government comes to collect your collateral.
Loss of Control
Private lenders typically allow for the borrower to have more control than the government will. If you want to sell a portion of your land, change the type of crop you are growing, or even give some land to a family member, this may violate your loan agreement with the federal government.
You will also not easily be able to seek additional loans for the property once you are already signed on for an FSA loan. The loan will dictate the terms of the other loans you may seek and secure, meaning that you could become 100% reliable on the federal government to finance your business and livelihood. Even if you have a mix of FSA loans and private loans guaranteed through the FSA, you are still liable to the government to come through with your financing.
The terms of your loan will determine how flexible it is down the line. While private loans, particularly revolving lines, will have some flexibility, government loans typically will not. You will have to abide by the terms set in your initial FSA loan for the life of the loan, even as your business grows and your financial situation changes.
For example, the FSA even dictates the length of a loan it will guarantee through a private lender. When you do seek additional financing through rural loans offered by banks, you will have to clear the loan with the FSA to ensure it meets FSA guarantee requirements before moving forward with the contract.