Managing machinery and its financing, Part 1
Managing machinery financing in volatile times
Reprinted from AgDirect Learning Center
Managing Volatile Times: Machinery ROI and Financing
With challenging grain markets continuing their stranglehold on revenue potential for crop producers, making sure you have the right machinery lineup is one way to operate efficiently and capture every dollar of potential revenue possible.
It’s important to ask key questions when auditing the costs and benefits of a farm machinery lineup, especially when pondering a change or addition. Determining each machine’s return on investment (ROI) can start the process of finding the best way to match inventory with specific needs moving forward.
“Is it going to increase my production? Is it going to decrease my costs?” says AgDirect Territory Manager Jill Beck. “Take the time to sit down and figure that out for every piece of equipment.”
Finding machinery ROI
For machines like tractors and combines, answering those questions relating to ROI is easy. But for things like precision ag technology tools, it’s more difficult to pinpoint the exact financial justification for their place in a machinery lineup. It can also be difficult to answer ROI questions “in a vacuum,” Beck adds, making it important to do your homework and consider enlisting a farm financial specialist or farm manager in finding those answers.
“You’re not always just buying the machinery. You’re buying technology, too. Does that technology reduce your costs? It’s important to find out how those tools influence your overall machinery ROI,” she says. “And, consider what is happening on the farm. What happens if you get 6 inches of rain at harvest? You need to be able to know how ROI calculations change because of conditions like these.”
Make machinery meet your needs
Once you know each machine’s ROI, it’s important to make adjustments to your machinery lineup in order to match it specifically to your needs. In order to operate most efficiently, that could mean either adding or removing specific pieces.
“It’s not always a cost-cutting operation. You may need to add machinery,” Beck says. “You need to maximize your equipment to match your acres, and it all starts with a good cost estimate and breaking down what you need to raise your crops on your acres.”
The process of modifying machinery inventory to maximize ROI also involves financing. In some cases, outright ownership may be the best approach, while for other producers, leasing is a more viable option. Which works best usually depends on whether equity is necessary to maintain a healthy balance sheet in the long run.
“Do you need equity on your balance sheet when you go to finance something? For some producers, equipment equity is a necessity. It is important to look at your balance sheet so when you need to procure operating financing, it will work,” Beck says. “But, it may make more sense to lease so you aren’t carrying as much liability. You may not need to show equity; it may be more important to match your cash flow needs. And sometimes, a short-term financing solution can translate into a long-term plan.”
Good relationships are key
One example of this type of financing solution is a rental agreement that can transition into an outright purchase plan. This type of deal helps the dealer move inventory from his or her lot, and helps the buyer meet cash flow needs.
“If you are prequalified, you can rent a machine, then work with the dealer to turn your rent payments into a down payment, then finance from there. You can use that rent as the down payment in the spring to match your cash flow,” Beck says. “If the dealer can find a way to move that machine off the lot, they’re interested. The dealer needs cash flow right now, too. There are win-wins like this out there, but we just have to be more creative with them today.”
That sort of arrangement requires a good relationship between the buyer and seller. “That good relationship will help make a deal that makes sense for both the dealer and customer,” Beck adds. “There has to be trust between them.”
Your machinery financing partner
At FCS Financial AgDirect, we have financing options for purchases at the dealership, whether lease or outright sale. We’re dedicated to agriculture and offer many financing options to fit any operation, whether buying used or new machinery. We offer financing for buying, leasing or refinancing, with fixed- and variable-rate terms from two to seven years. We also offer delayed payment plans with no prepayment penalties.