- Some are very large landholdings, others quite small. Some involve animals, some involve crops, some are organic, and many are a mix of all of these types.
- It is crucial that anyone involved in the operational management of a farm or related agricultural business understands not only the costs of business, but the best way to finance it.
- Many farms choose to buy their tractors and other agricultural equipment outright, largely because it's the easiest thing to do, and gives them the most control over their costs.
Anyone involved in a farm of any size, or any type of agricultural business, will know that the costs of running such a business can be substantial, and it needs careful planning and long-term sustainability.
Any business has to be aware of its costs, both fixed and operational, and farming and agriculture can pose special challenges in this regard. The farm is often seen as something of a lifestyle choice as opposed to an operational business.
Whilst this is not really fair, it is a perception that many finance houses have, and can affect the nature of loans and credit that are available, and the subsequent impact they have on the business.
Agricultural businesses can take a number of different forms. People commonly think of farms, and these can be many different sizes and types.
Some are very large landholdings, others quite small. Some involve animals, some involve crops, some are organic, and many are a mix of all of these types.
All these farms have different requirements both in terms of equipment, labor force, and finance. Many farms are also family owned businesses, creating separate issues regarding home and business that can also complicate credit and loan arrangements.
Add into the mix relevant subsidies and potential help from state and federal sources, and it should be clear that getting the finances right can be quite a complex business.
It is however crucial that anyone involved in the operational management of a farm or related agricultural business understands not only the costs of business, but the best way to finance it.
Other agricultural businesses apart from farms can also include lawn and garden businesses, landscaping and ground care, golf and sports turf and forestry businesses.
Understanding the needs of financing a farm can be quite specialized. These needs include equipment such as tractors, combine harvesters and trailers as well as normal motor vehicles such as cars, trucks and motorbikes.
Costs include not only the purchase or leasing of this equipment, but also the insurance and associated running costs.
Other costs can include employee costs, building costs, animal and livestock costs, different types of insurance as well as costs that are not in control of the business, such as the effects of drought etc..
Sources of funding
Funding for credit and finance is likely to come from most standard banks and finance houses, but there are also a number of manufacturers such as John Deere and Kubota who have their own in house credit facilities.
From an applicant’s point of view, it can feel more helpful to try and obtain credit from the same company that they are purchasing or leasing the equipment from.
From the company point of view, all applications for credit and finance will be looked at in a purely commercial sense, whoever the potential lender is.
Decisions will be made based on a number of factors, including the credit score and background history of the applicant.
Applications for farming credit can be complicated by the fact that a farm is often a combination of a business and a home. This can be a good reason why someone with a complicated credit history may find a specialist lender more helpful.
Many farms choose to buy their tractors and other agricultural equipment outright, largely because it’s the easiest thing to do, and gives them the most control over their costs. They can negotiate with a dealership over the price of a tractor and then buy it in the way they would any other vehicle.
This would involve paying a deposit, agreeing an interest rate on the rest of the money owed, splitting it into a number of equal monthly payments, and once all payments are finished, the farm owns the tractor outright.
This can sometimes have certain tax advantages by way of being able to offset depreciation of equipment, but this can depend very much on where the farm is based, geographically.
The other main way of financing equipment is to lease it. Leasing a tractor should be thought of in the same way as renting one. This has a number of advantages over buying one outright, one of which is that it allows the farm owner to upgrade equipment much more easily.
Leasing equipment works with the farm owner paying a deposit, agreeing a fixed monthly fee for the term of the lease, and returning the equipment when the lease finishes.
There is normally an option to purchase the equipment if wanted when the lease runs out, the details of which should be negotiated when the lease is taken out and starts.
There are likely to be additional restraints of use of the equipment if it is leased, which again should be negotiated at the outset of the lease so there is clarity about what is being offered.