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Is a Farm Equipment Loan the Right Choice for Your Business?

posted on Monday, May 20, 2019 in Business

Image of farmer in tractor.

As a farmer you rely heavily on the equipment you use. Whether you are making an initial investment or replacing a piece of heavy equipment, there are multiple factors to take under consideration when determining if a farm equipment loan is the best financing option.

If you’re considering purchasing a piece of new equipment, we recommend asking yourself these three questions:

  1. What is my farm’s current financial position?

  2. What is the financial impact on my business?

  3. Who should be involved in the decision?

Let’s take a closer look at each of these questions.

What is my farm’s current financial position?

Pull out your current budget and let it serve as a financial road map to help guide your purchase decision. Farm equipment is a large investment, and rarely can a farmer buy multiple pieces of new equipment in the same year. As you look at your budget ask yourself, “If I can only buy one thing right now, and I can’t make another purchase for the next three-to-five years, what should I buy?”

Your budget encompasses everything from crop yields and livestock prices to production expenses, such as fertilizer, fuel, insurance and rent. This level of financial insight is beneficial when you sit down with your banker to compare farm equipment loan options.

Your banker will help you compare what your total cost of ownership will be for the new equipment versus the equipment you want to trade in.  They will also work with you to compare and contrast various financing options based on the type of business you own. For example, the equipment you purchase and how it’s used can differ from a livestock farmer to a cash grain operation.

What is the financial impact on my business?

It’s important to examine every capital purchase that requires additional debt. As you consider applying for a farm equipment loan ask yourself if the new equipment will generate the cash flow needed to pay for itself.

The best way to answer this question is by determining what the financial impact will be on the overall debt and cash flow of your business. Taking a global view is important because even if you can make the capital purchase, that doesn’t mean your business as a whole will have the cash flow it needs.

If a new piece of equipment can’t create enough cash flow to pay for itself over a reasonable period of time, or it doesn’t support the overall financial well-being of your business, it’s best to defer the purchase.

Who should be involved in the decision?

Having a team of people you know and respect to serve as a sounding board is a huge asset for your business. It’s a lot easier to create positive outcomes and avoid financial problems when you work with your banker and CPA to purchase farm equipment.

Your commercial banker is a great person to bounce ideas off of and help you dig deeper into your finances and run the numbers. And they will walk you through all of the leasing and financing options that are a good fit for your business.

Your CPA plays a vital role in an equipment purchase because they will help you navigate bonus depreciation regulations and will be able to provide sound advice on the decision that will benefit your business.

If you are exploring an equipment purchase for your business, contact one of our business bank representatives today to learn more about the support and resources Northwest Bank has to provide your business.
 


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