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Understanding your equipment financing options

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Securing the right financing for an equipment purchase is essential to the productivity and profitability of many farm operations. That’s why it’s critical for producers to understand their loan and lease options by comparing interest rates, terms and repayment schedules. 

“There are many factors that go into a financing structure decision,” says Amy Weum, regional vice president of CoBank Farm Credit Leasing. “Cash flow and payment are typically the first things to consider.” 

Other important considerations include current tax laws and tax treatments that fit a producer’s needs as well as the length of time they plan to keep the equipment and their ability to pay the structure off early, she says. 

Evaluating term length

When it comes to selecting the length of a loan or lease, longer terms are desirable because they can offer more flexibility and enhance cash flow. For example, if a producer is looking for a lower payment to free up working capital, a longer-term structure may be preferable. 

In contrast, if a producer is on a three-year replacement cycle they may benefit from a five- or seven-year AgDirect lease, rather than a three-year term, because they could take advantage of a lower payment and have the ability to trade in and pay off their old lease at any time without penalty. Or, if plans change, they can keep running the equipment until the lease ends in five or seven years. 

According to Weum, current ag economic conditions favor equipment financing structures with longer terms. 

“If cash flow is a concern, a longer-term lease would be desirable,” she says. “Additionally, if a producer plans to keep or trade their equipment at the end of the term and they don’t need the option of returning the asset to the financing company, an AgDirect PUT (purchase upon termination) lease offers the lowest possible lease payment with a high residual and the ability to take advantage of bonus depreciation tax benefits.” 

Rates and terms vary 

Just as financing structures vary based on equipment type, age and a producer’s credit quality, loan and lease terms also influence interest rates. 

At AgDirect, most new to five-year-old equipment, including tractors, combines, sprayers and forage harvesters, can be financed for up to seven years. 

Longer terms typically have slightly higher interest rates than shorter terms; however, the flexibility longer terms offer often surpasses the extra interest paid. Another notable aspect of AgDirect financing is that leases and loans ranging from two to five years have the same rate. 

“AgDirect understands producers’ unique needs and offers flexible payment structures to meet those needs,” says Weum. “One example is a harvest pay lease where a producer pays a minimal amount out of pocket to start the lease followed by annual payments that begin after six months.” 

“AgDirect can also match up payment schedules to correspond with the cash flow timing of a producer’s operation,” she adds. 

Whether you’re considering a loan or a lease, take the time to ask questions and understand the terms of the agreement to ensure it aligns with your operation’s financial goals. It’s also a good idea to consult with your accountant or tax advisor to discuss your specific tax circumstances and cash flow requirements. 

Learn more about your equipment financing options by locating your nearest FCS Financial office.

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