Farm Equipment Loans 101: What Are They and How Do You Qualify?

Farm Equipment Loans 101: What Are They and How Do You Qualify?

Farming is a business with significant equipment needs. Every farm operation relies on tools to help get the job done. While some equipment may only be a small purchase, other equipment is a significant investment.

Because the equipment is a major cost driver for farm operations, it is critical to evaluate and plan for your ongoing needs. In some cases, a farm equipment loan might make the most sense. Because the equipment is vital to keeping an agricultural business running at full capacity, it becomes a purchase that cannot be delayed.

Considerations of a Farm Equipment Loan

The decision to replace farm equipment is complex. When looking at existing equipment, you should factor in reliability, changes in capacity, and tax savings of a new equipment purchase.

But it is more than just the up-front cost. The total cost of ownership includes maintenance and the interest that may be paid on financing the purchase. However, these costs may be offset if production can increase, be made more efficient, or savings in repairs on older equipment.

As you look to make an equipment purchase, you can consider buying at a slow time to get a better deal. You can look at different financing options. An experienced agricultural lender can help you find the right loan term with a competitive interest rate and affordable repayment.

Reliable equipment can improve your overall farm operation. Purchasing production and processing equipment and help improve your profitability. Farm equipment loans can be used for a range of equipment and vehicles, such as:

  • Combines
  • Tractors
  • Balers, plows, planters, and sprayers
  • Drying and storage equipment
  • Logging equipment

At the time that you begin assessing your equipment purchase, you should also start working on your loan application. You want to have your financing lined up at the time that you make the decision on which piece of equipment to buy. Even if you do not have the specifics, such as the final purchase price, talking to a lender can give you an idea of the terms and the monthly payment.

Information Needed for a Loan Application

If you have not taken out a farm equipment loan before, or it has been a while, you need to be prepared with some information when you talk to a lender. Having this information ready can make the process go more smoothly.

You will need to prepare a financial statement. These are often detailed and can take some time to compile. You’ll need to provide schedules of your existing machinery and equipment, as well as your crop/livestock inventory, real estate, and other assets. You’ll also need to identify any debts that you have, both personal and for the farm operation.

You will need to provide several years’ worth of tax returns. The lender will look closely at your Schedule F to analyze your farm income and expenses. If you have your operating line of credit with the same bank, they may have some of this information on file, along with your projected cash flow for the year.

Once you have identified the equipment that you want to purchase, you need to give the bank a description of the equipment and the purchase price. This will be the collateral for your new farm equipment loan.

How to Qualify For a Farm Equipment Loan

The bank will gather your financial information and put your application through underwriting. A credit analyst will examine your cash flow and overall farm business based on the information that you have supplied.

Because of the cyclical nature of farming, cash flow can be tricky. You may have months where you do not have as much income, yet the equipment loan will still have a fixed monthly payment. Fortunately, experienced agricultural credit analysts are very familiar with monthly cash flow analysis and know-how to assess shortfalls.

If you have an agricultural operating line of credit, this can further supplement the months where you may fall short. The bank will know that you have access to funds, provided you have enough available on the line even with the new payment.

The bank is ultimately looking at your repayment capacity: does your farm operation generate enough income to make the payment on the new loan for farm equipment?

FSA Guaranteed Loans

If you have trouble qualifying for a loan due to lack of collateral, lack of credit, or lack of financial equity, you may be able to get a Farm Service Agency (FSA) guaranteed loan. The loan is still between you and the bank, but the FSA backs the loan, making it less risky for the bank.

While the FSA does not do term loans specifically to finance the purchase of equipment, it does provide operating loans, which could be used to buy equipment.

The FSA has different requirements for loan eligibility. You should talk to an FSA lender to determine what else you may need. In addition to the bank’s own requirements, you may need to provide a resume, farm history, information on any past government loans, projections, and five years of crop yields.

The bank will go through its own approval process for your loan. Then the lender will submit your application to the FSA for approval. If approved, the FSA notifies the lender to close the loan and disburse the funds.

Finding a Lender for Your Farm Equipment Loan

When it comes to financing your farm equipment loan, you want a lender that understands agricultural lending. Farm operations are unique and different from commercial businesses. An experienced ag lender will help you find the right type of loan and terms to purchase farm equipment.