Growers who need farm equipment financing can find a variety of lenders and financing options. Interested borrowers can pursue farm equipment loans to purchase farm equipment or, if they prefer, an agricultural equipment lease.
Key Points
• Farm equipment financing is available from the USDA, traditional lenders, leasing companies, and federal farm credit banks.
• Financing a purchase enables farmers to acquire equipment sooner and make manageable monthly payments.
• Loan applications are likely to require financial documents, a business plan, and records of the farm’s production history.
• Seasonal payment options can help farmers manage cash flow during difficult times of year.
• Interest payments on farm equipment loans may be tax-deductible for some farms.
What Is Farm Equipment Financing?
Farm equipment financing can help you pay for agricultural equipment such as tractors, harvesters, dump trucks, planters, combines, utility vehicles, and more. You can purchase new or used equipment with a farm business loan; the machinery you’re buying usually serves as collateral. Loan terms can range from one to 10 years.
Types of Farm Equipment Financing
There are a few different types of ag equipment financing providers, including USDA loans, traditional equipment loans, agricultural leasing, and farm credit system options.
USDA Loans
The United States Department of Agriculture (USDA) provides operating loans to farmers and ranchers to purchase essential items, including equipment. Rookie farmers could turn to USDA loans as an alternative to startup business loans. The USDA also makes funding available to farmers and ranchers who are socially disadvantaged or who have been hit by economic hardship.
The USDA both makes direct loans and guarantees loans for commercial lenders. Interest rates for USDA loans are often lower than other small business financing options, but getting the loan approved can take longer.
Traditional Equipment Loans
You could also get traditional equipment financing — that is, a loan not specific to farming — from online or direct lenders. Lenders who don’t specialize in ag loans, however, may or may not be familiar with all the factors that go into the business of farming.
Agricultural Leasing
Leasing is another option for ag equipment financing. When you’re assessing leasing vs. purchasing equipment, consider how long the equipment will be useful to you. If you need it for only a short time, leasing can be a good option. Also, if new technology is likely to change the equipment frequently, leasing gives you the flexibility to upgrade to newer models without facing the sunk cost of ownership.
Farm Credit System Options
Farm Credit is a network of customer-owned cooperatives that provide loans, insurance, and financial education to rural people. Growers, ranchers, and other agricultural producers can access the Farm Credit network’s online business loans along with an array of planning and budgeting resources.
Qualification Requirements
Criteria for these loans vary, so before applying for a farm equipment loan, look at each lender’s specific requirements. Typical conditions include details about credit history, farm revenue, and loan collateral.
Credit Considerations
Most lenders figure in the applicant’s personal credit score when considering a loan application. As usual, the higher your credit score, the better your chances of being approved. The minimum credit score needed will vary by lender and loan.
If your score is low, you may still be able to get farm equipment financing. USDA farm loans may be available to farmers with low credit scores. There are other bad credit equipment financing options, too. Some online lenders may have more flexible loan requirements and a willingness to work with startups or businesses with bad credit.
Farm Revenue Requirements
As part of your application, most lenders will also ask to see information about your farm’s annual revenue. How much revenue you’d need for loan approval will depend on your lender’s rules and the terms of the proposed loan.
Collateral Options
Many ag equipment loans allow you to use the farm equipment as collateral. This means that if you can’t repay the loan, the lender can take back the equipment.
Benefits of Financing Farm Equipment
Financing farm equipment allows growers who can’t afford major machinery costs up front to go ahead and buy the big-ticket items they need. They can then start or expand their operation sooner than if they had to save up for the equipment first. Financing also enables borrowers to break down the cost of expensive purchases into manageable monthly payments.
Ag equipment loans may also have lower interest rates than other types of business loans, especially if the borrower has good credit.
Seasonal Considerations
Some farm equipment financing can resemble business lines of credit that accommodate agriculture’s seasonal nature and characteristic cash flow cycle. In some cases, a lender will allow borrowers to set up delayed payments for up to 15 months.
Tax Implications
Interest payments on farm equipment loans are often tax-deductible. A farm with three years’ worth of average annual gross receipts under $30 million is likely to be eligible for this deduction, but be sure to consult a CPA or tax attorney who’ll help you figure out the right answer for your situation.
How To Apply for Farm Equipment Financing
When you’re trying to get farm equipment financing, you’ll generally need to show a stack of financial documents to the lender. Common examples include your business and personal bank statements, business and personal tax returns, your financial history, the farm’s production history, a balance sheet, current leases and contracts, a business plan, and a list of existing creditors.
The Takeaway
Farm equipment financing is available from a range of sources, including government agencies, lenders that specialize in agriculture, or traditional lenders. These loans typically use the equipment itself as collateral. For short-term equipment use, leasing could be a better choice.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What are USDA equipment loans?
USDA equipment loans can be used to start, expand or maintain farms. Many of the USDA loans go to socially disadvantaged people, those who are just starting out, or those who have faced economic hardship.
How do seasonal payments work?
Some farm equipment financing takes into consideration farms’ unique cash flow cycle and seasonal nature. You may be able to set up seasonal payments — that is, annual, semiannual, or quarterly — on your farm equipment financing.
What tax benefits are available for farm equipment?
Interest payments on farm equipment loans are often tax-deductible. Many family farmers could qualify for this deduction, but it’s essential to consult a tax professional (CPA or tax attorney) to get the right answer for your situation.
Can I finance used farm equipment?
Yes; many farm equipment loans can go toward the purchase of used equipment.
What documentation do I need for a farm equipment loan?
Generally, documentation requirements vary by the loan type and lender. Among the documents lenders often ask for are tax returns, bank statements, a business plan, your financial history, the farm’s production history, a list of current creditors, a balance sheet, and existing leases and contracts.
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