Despite the fact that farm workers comprise less than 1% of the U.S. workforce, they collectively generate more than $200 billion dollars a year in food commodities.
To achieve this staggering level of productivity — and ultimately put food on the table for hundreds of millions of people at home and abroad — farms, whether they’re family-owned or corporately owned, need the right agricultural equipment at the right time and at the right price.
That’s where equipment financing for agriculture enters the picture – it’s a way of getting access to additional funds so you can purchase the equipment that your business needs to boost efficiency and productivity.
Let’s take a look at some of the benefits and best practices of equipment financing for agriculture:
What is Equipment Financing?
Equipment financing is a type of loan designed to help businesses across various industries purchase the equipment they need without having to pay the full purchase price upfront.
In most cases, the equipment itself serves as collateral for the loan, providing a guarantee for the lender against defaulting; which in turn makes interest rates more competitive, and terms more flexible for you as a borrower.
This financing option can be used for different types of equipment, including machinery, vehicles, technology, and tools – and it can be structured as a loan, lease, or hire purchase agreement.
When it comes to equipment financing for agriculture, some types of equipment that you can purchase through this type of loan include:
- Tractors and Harvesters
- Planting Equipment
- Irrigation Equipment
- Harvesting Machines
- Dairy Equipment
- Livestock Feeding Equipment
- Sprayers
- Utility Vehicles
- Tillage Equipment
- Greenhouse Equipment
By using equipment financing, you can spread the cost of equipment over time, preserving cash flow, which you can use to invest in other areas of your business.
What Are The Benefits of Equipment Financing For Agriculture?
If you want to maximize the efficiency and productivity of your farm, there are multiple benefits of equipment financing for agriculture that you can take advantage of:
Preservation of Cash Flow
By financing equipment as opposed to buying it with your own funds, you can keep your cash reserves intact for other uses. For example, you can purchase seeds, livestock, or fertilizers, among other day-to-day expenses.
However, you can also preserve your cash flow with the goal of maintaining liquidity – in the case of unforeseen expenses, emergencies or opportunities, you will be able to respond quickly without depleting your cash reserves.
Technology Upgrades
Another benefit of equipment financing for agriculture is the ability to access the latest technology and gain a competitive advantage in the industry. For example, you can invest in GPS-guided tractors, automated harvesters, and precision farming tools.
These technologies enable more precise planting, fertilizing, and harvesting, which in turn increases the yield per acre. The results are increased productivity, improved crop management and data utilization, as well as reduced labor costs.
Avoiding Obsolescence
Speaking of the benefits of equipment financing for agriculture, another one that we can’t forget to mention is avoiding obsolescence. The agricultural sector is rapidly adopting new technologies, which means that farmers upgrade to newer models more frequently.
By purchasing equipment through a loan as opposed to saving cash over a long period of time, you can stay up-to-date with the latest technologies and maintain a competitive edge.
No Down Payment
As opposed to other types of business loans, equipment financing often requires little to no down payment – which is one of the most sought-after benefits of equipment financing for agriculture.
Since the equipment itself serves as collateral for the loan and may not require additional assets as security, this financing can be easier to obtain than unsecured loans – especially if you need to expand your operations without existing capital.
In addition, this benefit allows you to start using your equipment with minimal initial investment. This is particularly important during planting or harvest seasons when cash flow might be tight, but you urgently need the equipment.
Equipment Financing For Agriculture: 7 Best Practices
So, what are the best practices when it comes to applying for equipment financing for agriculture? Let’s take a look:
1. Do Your Homework
It’s important for you to carefully research the agricultural equipment you want to buy; not just to ensure that it fits your farm’s business plan, but so that you take into consideration all costs of ownership that will exceed the initial purchase price (e.g. maintenance, electricity, gas, etc.).
2. Confirm Your Procurement Options
Some financial institutions that offer equipment financing in the agricultural sector impose restrictions on which vendors you choose.
It’s NOT in your best interest to partner with these lenders. Instead, you can partner with Specialty Finance Group National Business Capital.
You should have the freedom to choose the vendor you wish and be empowered to negotiate accordingly (i.e., vendors who know you have a limited pool to choose from are likely to exploit this restriction).
3. Factor In The Tax Benefits
When it comes to equipment financing for agriculture, you should be able to take advantage of two different types of tax deductions, which are not available through leasing.
The first is linked to the interest payments on your loan, and the second is the depreciation of your asset (or assets). Speak with your accountant or other financial advisor to get the details, and prepare for a surprising and significant break from good ol’ Uncle Sam.
4. Slow Times Could Be Ideal
If your business is a little (or perhaps more than a little) on the slow side, then you can be assured that belts are tightening for vendors who sell agricultural equipment.
As such, rather than reducing or pausing your investment plan, it could be the ideal time to head in the other direction — since you’ll be able to negotiate an attractive deal, and get the assets you need to increase your farm’s productivity, capacity and profitability.
5. Choose a Loan Duration That Enables Affordable Repayment
When it comes to equipment financing for agriculture, we also recommend choosing a loan duration that enables affordable repayment.
While your total cost of borrowing is primarily based on the prevailing interest rate, the scheduled repayment amount (typically monthly) will be determined by the loan duration.
Your best move is to choose the shortest loan duration that — and this is the critically important part — allows you to make affordable payments. You don’t want to be spread thin and forced to raise additional capital just to serve your financing costs.
6. Consider Augmenting Your Loan with a Business Line of Credit
A revolving business line of credit is essentially like a credit card, where you pay interest on the amount that you borrow (not the full amount available). If the line is revolving, then the repaid funds are available to you again and again.
Having a business line of credit at-the-ready is wise for covering unexpected short-term expenses that may be related to your agricultural equipment purchase.
For example, you may need to cover some post-purchase modifications, purchase additional insurance, and so on. Combining business line of credit with equipment financing for agriculture can help you make the best of new opportunities.
7. Consider Replacing vs. Repairing
Farm owners don’t need to be reminded that “a penny saved is a penny earned.” However, there are times when repairing farm equipment doesn’t make sound financial sense; especially if the equipment in question is several years old and is not as productive, efficient, and/or capable as modern versions.
As such, don’t just focus on how equipment financing can help you purchase new assets. It may be just as wise — or necessary — to replace existing assets.
Getting Equipment Financing For Agriculture With NBC
If you want to get equipment financing for agriculture, look no further than National Business Capital. With $2+ billion financed since 2007, multiple awards, and an experienced team of Business Finance Advisors, we have everything you need to find the best financing options for your project.
Are you ready to get started? Apply here.
Frequently Asked Questions
What are the interest rates for equipment financing in agriculture?
Interest rates for agricultural equipment financing can vary widely, typically ranging from 5% to 20%. The rate depends on factors such as the lender, the creditworthiness of the borrower, the type of equipment, and the loan term.
Lower rates are often available for borrowers with strong credit histories and substantial collateral.
Can I finance used equipment or only new equipment?
Yes, you can finance both new and used agricultural equipment. Financing used equipment is a common practice, especially for cost-conscious businesses looking to maximize their budget.
The terms and availability might differ based on the equipment’s age, condition, and resale value, with potentially higher interest rates or stricter terms compared to new equipment.
Is there a penalty for early repayment of the equipment loan?
Whether there’s a penalty for early repayment of an equipment loan depends on the lender’s policies. Some lenders may charge a prepayment penalty to offset the lost interest income, while others might offer penalty-free early repayment as a benefit.
It’s important to review the loan agreement or discuss this with the lender before finalizing the financing to understand any potential penalties.
What are the typical repayment terms for agricultural equipment financing?
Typical repayment terms for agricultural equipment financing range from one to seven years, depending on the type and expected life of the equipment.
These terms are designed to match the useful life of the equipment and the cash flow patterns of the farming business, with options for seasonal payment schedules to accommodate fluctuating agricultural revenues.
Do I need to have insurance for financed equipment?
Yes, when financing equipment, lenders typically require insurance on the financed equipment to protect their investment. This insurance should cover potential risks like theft, damage, and loss.
The specifics of the coverage required can vary, so it’s important to discuss the details with the lender and ensure the insurance meets their stipulations.
Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advice from National Business Capital and the author. Do not rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely on this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there may be errors, omissions, or mistakes.
Joseph Camberato
Joe Camberato is the CEO and Founder of National Business Capital. Beginning in 2007 out of a spare bedroom, Joe and his team have financed $2+ billion through more than 27,000 transactions for businesses nationwide. He’s made it his calling to deliver the educational and financial resources businesses need to thrive.
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