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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.

• Put Together A Realistic Budget 

  Creating a monthly budget is a great way to save for a down payment on a home while also giving you a better idea of how much you can realistically spend on a monthly house payment.
  
  
  • The general rule of thumb is that a household should spend no more than 28% of its total monthly income on housing expenses. Another recommendation is that the household should spend a maximum of 36% on all of their debt, combined. Knowing this, and these numbers, should help as you begin to plan a budget that doesn’t break the bank and leave you financially distressed.
    
    
  • Budgeting is a great way to get in the habit of paying a large monthly payment. A great place to start would be by putting an estimated house payment into a designated savings account each month to help you save up for a down payment, while also getting you into the habit of spending $XXXX each month (with money set aside for additional housing expenses that may pop up along the way).

• Save Up For a Down Payment

  Most financial institutions recommend saving at least 20% of your total estimated mortgage when buying a home.
  
  
  • The more money you have to put toward a down payment, the lower your interest rates and monthly payments. This can take months, even years to accomplish; which is why is important to start saving early when considering buying a home.
    
    
  • Another option is to apply for an FHA loan. These loans, insured by the Federal Housing Administration, are strictly reserved for first time home buyers. They allow lower down payments (3.5%) as long as you have a 580+ credit score. You can still qualify for an FHA loan if your credit score ranges from 500-579 if you have 10% down. Mortgage insurance is required for these types of loans, but it makes buying a home more affordable for those who aren’t capable of saving 20% of their total estimated mortgage cost.

• Pay Off Your Debt

  Before diving headfirst into a heaping new pile of debt, you should begin working to pay off your smaller loans to help cut back on your monthly costs. A great strategy to apply here is the debt snowball technique taught by personal finance guru, Dave Ramsey.
  
  The Debt Snowball 
  • This strategy revolves around paying off your smallest loans first while continuing to make the minimum payments on your larger debts. As you pay off each loan, you will then redirect or “snowball”, the funds you were spending toward your next loan on your list, with each payment getting larger and larger without changing your monthly living costs. This strategy may not save you on interest, but it helps keep you motivated to tackle each loan.
    
    
  • Think of it this way: Say you have a car loan for $12,000 and a total of $40,000 in student loans. You would dedicate as much of your expendable income as possible toward your car payment ($300/month) until that loan is paid off while still making the bare minimum payment of $400 on your student loans. Once your car is paid off, you would then pay a total of $700/month of your student loans until those are completely paid off.
    
    
  • The debt snowball technique is just one of the many strategies used to pay down your debts. Do your research and find one that works best for you. Keep in mind that as you pay off each loan your credit score will change. Some debt can be used to your advantage when it comes to building your credit score (see below).
    
    

• Build Your Credit Score

  Your credit score has a major impact on your ability to finance a home. The higher your credit score, the lower your interest and monthly payments will be
  
  
  • Lenders look at your credit score as a way of analyzing whether or not they can trust you to make monthly payments. It is important that you are familiar with your own credit score and that you work to improve your credit score in the months leading up to applying for a mortgage.
    
    
  • Make sure not to close any of your current accounts during the same calendar year that you plan to buy a home, as this can drastically affect your score. Be sure not to sign or co-sign for any other major loans during that time, as well. Reach out to a bank mortgage loan officer at Farmer’s Bank for more information on ways to improve your credit score. Contact us at 208-734-1500 or contact us online.
    
    

• Last but not least… Do your homework & be realistic with your goals

  
  Don’t rush into a mortgage just because you’re in a hurry to close on a home. Be sure to look into different lenders and options to make sure that you get the best deal possible - you’ll be making payments on this mortgage for a good portion of your life so make sure to take your time and do your research. Understand the difference between a 15- and a 30-year mortgage while also double-checking on prepayment penalties to ensure you don’t get penalized for paying your mortgage (or any other loan) off early.
  
  Realistically set a time frame that you aim to accomplish these tasks so that moving forward you’ll be set up for success. The more upfront you are with your goals and expectations at the beginning of the process, the better off you will be five years down the road when you’re in the smack-dab in the middle of it all.

• Know What Your Credit Score Is (Weekly and Annual Reports): There are free credit monitoring apps and services that you can use to check your credit score weekly and annually. Both Credit Karma and TurboTax are great resources to give you good perspective as to what your credit score looks like on a week-to-week basis. Weekly monitoring is a great way to catch little mistakes and stay up-to-date on all of the changes happening on a weekly basis. You should also take advantage of the opportunity to request your full credit report one time per year without having an affect on your score.
  
   
  

• Dispute Inaccuracies: As soon as you come across a red flag that there was a hit on your credit, dispute it. A missed payment that wasn’t truly missed or an account opened under your name by somebody else can take a serious toll on your credit score. That is why it is so incredibly important that you dispute any mistakes that you find as soon as they arise. At the end of the day, you are solely responsible for your own credit health.

• Pay Your Bills On Time (Or Before They’re Due): While there are multiple factors that affect your credit score, payment history is the most important of them all. Making up 35% of your FICO credit score, missing a single payment can be detrimental to your credit health. These marks can leave lasting impressions on your credit report for up to seven years. The best way to prevent this from happening altogether is by setting up automatic payments that are scheduled to go through before your bill is due. This will ensure that payments are made on time, and will boost your score even more by paying before the initial due date. Making multiple payments throughout the month is another great way to score extra points on your report, as well.

• Take Out A Secured Loan or Credit Builder Loan: Creditors want to see that you’re utilizing your credit and making monthly payments. By taking out a secured loan, you are putting up collateral to back the loan to ensure creditors that you’ll be making payments on time. You can either use the loan to pay for something you currently need, or save it to repay the loan monthly to guarantee that you’ll have the funds to do so. A Credit Builder Loan is another great option because you will essentially get all of your money back once the loan is paid off. The money you put toward the loan goes into a savings account so that when it is paid off, a large percentage of it is returned back to you while simultaneously raising your credit score in the process - it’s a win-win.

• Apply For A Secured Credit Card: Secured Credit Cards are different from regular credit cards because you place a refundable security deposit on the card that acts as your credit limit. This guarantees that you will never spend more than you already have, but allows you to raise your credit score in a safe and practical way. Some secured cards even offer rewards programs as an incentive to sign up and utilize them.

• Keep Unused Accounts Open - Just Freeze Them: If you have older accounts that you don’t use anymore, push the pause button on calling to close those accounts. Instead, cut up the card and ensure you’ve paid off your entire bill before essentially forgetting about it. Letting your credit accounts age is a great way to raise your credit score over time while keeping multiple lines/forms of credit open looks great on your FICO report. On the other hand, don’t try to open six accounts in a single calendar year. The more hard inquiries you have on your account, the lower your score will drop. Spread out larger purchases to give your credit score a break.

• Keep Total Debt Below 10% of Total Available Credit: Your total available credit is the credit limit on all of your accounts. For example, if you have five cards with $2,000 limits on each card, then your total available credit is $10,000. Therefore, you should keep less than $1,000 total on your cards to maximize your credit utilization score.