Things to Think About When Financing Ag Equipment
Equipment financing is a common business practice across industries. Using borrowed money to pay for needed equipment helps save your limited capital for other business-related expenses. It also affords you the option of making balance sheet friendly payments while the equipment generates revenue for the business.
The need for farm equipment continues to rise with the Association of Equipment Manufacturers reporting an 11.3 percent increase in ag tractor sales and an 18.2 percent increase in self-propelled combine sales in the past two years. Farmers must consider all funding options before making these and other equipment related purchases. Agricultural equipment financing represents 10 percent of equipment financing in the United States, ranking it just behind the transportation and information technology sectors.
How do you decide if financing is the best option to pay for additional equipment? Start by answering these four questions before purchasing your next piece of agricultural machinery.
What is the expected return on investment (ROI)?
Identifying the potential return on investment is a critical first step in deciding if financing farm equipment is a wise choice for your business. Use your balance sheet to estimate the income the purchase will generate alongside the expenses associated with making the purchase. Don’t forget to forecast for down years. Regardless of each season’s profits or losses, the loan payment must still be made on time to avoid damage to your credit and avoid possible repossession.
Should I buy, lease or custom hire equipment?
Answer this question by comparing costs as they relate to your farm. In each situation, you’ll want to review your cash flow and seasonal needs. Avoid the urge to decide based solely on the equipment’s price tag. Lease options might be more financially attractive for one farm while a custom hire might be a better option for the next.
Are there benefits to buying used equipment instead of new or leasing?
Buying used ag equipment can save you money. But, as with all equipment purchases, it must make financial sense. Regardless of the initial cost savings, there’s little benefit to purchasing used machinery that results in poor performance on the farm. To avoid the negative impact a used equipment purchase can have on your balance sheet consider the following:
- Does the equipment have the features you need?
- How many use-hours has the machinery logged?
- Are you able to review the maintenance records?
- Is the price comparable to similar pieces of used equipment?
Apparent structural or component damage, e.g., electrical issues or rusted parts, should give you pause.
How long should I extend farm equipment financing?
Failing to time the life expectancy of farm equipment can be costly especially if you’re constantly paying for repairs on top of making monthly finance payments. Purchasing new or more efficient used pieces of machinery can put a stop to profit losses. If you finance your next equipment purchase, the financing term should be no longer than the life expectancy of the equipment. You’ll also want to account for depreciation.
Purchasing equipment is a significant investment whether you pay cash or take advantage of available financing options. Contact a member of our ENB Agricultural Banking team to learn how our customers can build equity in their businesses by maximizing profitability. ENB has serviced the agricultural industry since 1881 and understands the business side of farming. We can help you decide if now is a good time to borrow money to purchase equipment based on your financial goals.