Food Systems & Sustainable Agriculture

Financing a Farm: CSA vs. Unsecured Promissory Note

Access to liquidity is critical for farmers, who may only have income after harvesting crops but still need to make major purchases and maintain their farms throughout the year. Community members can help support sustainable agriculture through financing arrangements. CSAs and unsecured promissory notes are two methods of financing a farm. Though they are by no means the only options available to farmers, they are common choices.

CSA vs. Unsecured Promissory Note

CSA stands for community-supported agriculture. Under a CSA arrangement, customers give a farmer money in exchange for “shares” of the farm produce. Customers then receive boxes of produce at regular intervals as crops are harvested. A CSA can be set up without intermediaries. This can be a good option for smaller farm operations that are able to produce crops consistently.

An unsecured promissory note, on the other hand, is a legal document that requires an attorney. For a farmer, it comes with one huge benefit: There is no collateral required. Unsecured promissory notes can be useful to larger farm operations that require significant capital investments (such as for large machinery) or for farm operations that are just beginning and cannot yet rely on revenue to cover overhead.

The lack of required collateral lowers risk for farmers, as they won’t face repossession should they be unable to make loan payments. However, while the debt issuer still has legal tools at their disposal to attempt to collect the debt, these can be time consuming and expensive, with costs potentially outweighing the proceeds. Essentially, the debt issuer absorbs a considerable amount of risk.

How the Methods Compare for Farmers

At its heart, a CSA is a tool that regularizes cash flow. In addition to upfront payments, CSAs offer other benefits to farmers compared to a typical retail model. As marketing efforts are done outside of the growing season, they free up valuable time during busy months. The share-based model gives each customer a percentage of the crops, meaning that a low-yield year can be less impactful to the overall business. It also allows farmers to build strong relationships with customers and community.

There are, however, some downsides. First, farmers need to pay taxes on net income from a CSA, whereas with a loan they don’t pay taxes on the principal. Second, a CSA can’t bring in more capital than the expected value of the crops.

It should be noted that a CSA should not be structured as a loan because a debt that’s partially paid back in food may be deemed a gift loan by the IRS, which can lead to serious tax complications.

While a wide variety of personal and business loan products are available for financing a farm, an unsecured promissory note is an excellent way for debt issuers to support farms. Such notes can be drafted with allowances not seen in a typical arrangement, such as flexible payment terms and (most importantly) no collateral.

How the Methods Compare for Financiers

While the pros and cons are a little more equitable for farmers, the responsibility and risks are incredibly different for anyone interested in supporting farms. A CSA is, again, a retail arrangement that carries little risk.

However, the old investing adage of “low risk, low reward” is in play. A CSA does not offer systemic support to farmers, as the average person is not generally thrilled to find their home continually stuffed with boxes of produce they cannot use.

Unsecured promissory notes, on the other hand, are an excellent vehicle for lenders to supply farmers with needed capital. While unsecured debt always carries risk, some investors may see this as acceptable in the scheme of their greater mission. Such promissory notes can be a powerful instrument to finance farm operations and support community agriculture.

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