When you are looking to purchase your first rural property or add to what you currently have, the bank is generally the first thing that comes to mind when looking to borrow the money to make the purchase. In my experience, that may be setting yourself up for more headaches that it is worth.
My preference is to keep the bank as far away from my property as I can and this includes when it come time to borrow money to buy more land. Now I am not saying you need to save your money to buy acreage in cash. That is actually a really bad idea as you will tie up all the money you have which could be used for operating your business, you will miss out on the tax advantages of being able to expense your interest payments and limit your ability of expansion quite drastically.
Borrowing money to expand your farm business can be a good thing as long as it meets your needs and does not involve leveraging more that is really required. Most often, when you take a bank loan, the bank will want not only to have a lien on the property you purchase, but every other property and asset you have in the business as well a personally. This will generally be justified by the bank in stating if you have enough confidence in yourself to make the payment, this should not be an issue. So long as you pay, nothing will be in jeopardy.
While this may be true, the other side of the issue is that you are running a business and if you leverage every asset you have for a particular purchase today, what happens tomorrow if you need funding for something else?
The answer to that question is that you will need to return to the bank to ask them to lend the funding to you and if they refuse you, you will have no other options because you will not have any assets available to borrow against to get the additional funding you want. Most people do not see this until it is too late and they they have to scramble to find a way to take the bank out with Alternative Commercial Funding such as Commercial Rural Mortgage Lenders and the like.
I will tell you that this is much harder than is sounds. Most often, the bank will be so well entrenched in your business that taking them out will come at a great business and personal cost – something that is not discussed as you are signing the contracts with them at their office.
Banks are not always the worst choice, but they surely are not always the best choice. Please, do yourself a favor when you are looking to purchase property, do not just talk to your bank, also speak with Alternative Rural Mortgage Lenders for Rural Property Mortgages. The interest may be a bit more but you will not have all the other restrictions place upon you that you will likely have with the bank. Keep your eyes wide open!
As always, if you have any question or comments, I would be please to hear from you.