When it comes to securing the financing you need for equipment to help grow and expand your farm or agricultural business, you have two main options to choose from. Financing to cover the cost of new equipment or using the equipment you already own as an asset to secure additional funding.
Purchasing New Or Used Farm Equipment
Operating a successful farm takes a lot of commitment and often the right specialized equipment. But purchasing large pieces of farming equipment like tractors is expensive. This is where a farm equipment loan can help. A farm equipment loan will allow you to gain access to the financing you need, purchase the best equipment for your needs, and ultimately increase the productivity and profitability of your farm.
Preparing To Apply For Farm Equipment Financing
In Canada, there are plenty of lenders that offer farm equipment loans and each of them will have slightly different approval standards.
Nonetheless, farm equipment financing can involve a significant amount of money, so qualifying can be a bit tougher and more complicated than it would be with a normal installment loan. So, before you apply, make sure to consider the following factors:
1. What Type Of Equipment Do You Need?
Depending on what kind of farm you own, the equipment you need can range in all sizes and costs. For instance, you may want a tractor and other heavy-duty machines when your main product is vegetables. While fewer vehicles are required for dairy farming, plenty of tools are still necessary to feed, house, and milk your cows.
Maybe you’d prefer to purchase new items right off the bat because used ones may break down more often. Then again, what happens when you add fuel, insurance, and regular maintenance into the mix? Think carefully about what pieces are truly necessary to your operation, as well as which ones you can actually afford.
2. How Will The New Equipment Help Grow Your Business?
Even a well-established farm can experience financial troubles, many of which can be attributed to equipment that’s out of the owner’s budget or plain unnecessary to their operation. Before you apply for financing, consider how the equipment could impact your finances, versus how it would benefit your business throughout the years.
3. Is Your Credit Score In Good Standing?
When applying for a large amount of financing, most lenders will want to check your personal credit to confirm how financially responsible you are. A high credit score (660 – 900) means that you’ve been good at paying your other credit-related debts, so you’ll have an easier time getting approved for more money and a better interest rate.
Unfortunately, the lower your credit score falls toward the bad range (300 – 600), the more difficult and expensive it will be to obtain financing because it’s a sign that you’re more likely to default on payments in the future. As such, it may be a safer idea to spend time improving your score prior to applying.
4. Are You Prepared To Answer Questions About Revenue, Debt, And Profitability?
Since a farm equipment loan may be a lot of money for the lender, they will want you to present a solid business plan when you apply. You should also be prepared to answer various questions, such as:
- How much monthly/yearly revenue is your farm expected to generate?
- Do you have an active mortgage on the property or other existing debts?
- How much profit do you stand to make once all your current debts are settled?
- What is the market value of your commercial assets (vehicles, buildings, etc.)?
- Do you have a business partner or loan guarantor? (If so, they must be prepared to answer similar questions)
Benefits Of Financing Large Farm Equipment Purchases
Even second-hand farming equipment can cost a pretty penny, especially if you’re looking to purchase more than one vehicle, tool, or machine. Don’t worry, because the right type of financing comes with many benefits, such as:
- Affordable Payments – Expensive equipment is easier to purchase using multiple installments. With a farming loan, you can spread out your costs over a period of time.
- Build Credit – Full, timely payments can help build your payment history which may raise your credit scores.
- Better Loan Terms – Loans that are secured with collateral often come with better rates and terms.
What Type Of Farm Equipment Can I Purchase?
Although the size of the loan you’re approved for will depend on your credit and overall financial health, the right amount of financing can help you purchase almost any type of farming equipment you need, including but certainly not limited to:
- Tractors
- Loaders
- Harvesters
- Feeders
- Utility vehicles
- Greenhouse equipment
- Fencing & enclosures
- Sprayers & applicators
- Ventilation & lighting systems
Asset-Based Farm And Agriculture Loans
Established farmers and agricultural landowners often have entire barns full of high-end specialty farming equipment sitting around waiting for the season to start. This kind of equity can be put to good use when you need to make upgrades or repairs to your business. Borrowing with your farm equipment is a good way to qualify for lower interest rates, reducing what you spend in the long run on much-needed improvements.
What Is Asset-Based Financing?
When it comes to farm equipment financing, the majority of loans a lender will offer are asset-based, meaning the vehicle, machine, or tool you’re attempting to purchase will be used as collateral until you’ve completed your repayment plan. Until then, the lender will retain ownership over the asset’s title and will have the right to reclaim it if you default on too many payments.
Alternatively, you can offer up the title to the farm equipment that you already own, in exchange for a normal installment-style loan. However, any asset you offer must have sufficient value for your lender to recuperate their loss in the unlikely event that they need to seize and sell it. Both of these options are known as ‘secured’ loans since the asset’s title acts as security for the lender.
The Pros And Cons Of Using Your Farm Equipment To Secure A Loan
While asset-based financing can provide a lot of benefits to farm owners, it can also come with certain risks that must be taken into account.
Pros
- Larger Loan Amount – Due to the security your farm equipment provides, you may be offered more money than with a traditional unsecured loan. You may also qualify for a lower, more affordable interest rate, which may save you money in the long run.
- Better Repayment Terms – Some lenders will also give you a longer repayment term and won’t charge a fee if you repay the loan earlier than originally planned. This can give farmers like yourselves better management over your cash flow.
- Expand Business – Offering up existing assets can help you secure additional capital that you can use to improve and expand your farming business in other ways.
- Get The Equipment You Need – Lacking the right equipment can jam up your business, resulting in a lot of wasted time and money. With the right loan, you can finance the things you need to run your farming business.
Cons
- Missed Payments Penalties – Consistently defaulting on your loan can result in late penalties, added interest, unmanageable debt and potential negative effects to your credit. If you miss too many payments and don’t explain the situation, your lender may also take away your asset and sell it at auction to recoup payment.
- Collections – If your debts go unpaid for long enough, you may be forced to deal with a collection agency or, in the worst of cases, declare bankruptcy
Common Uses For Secured Farm Loans
As mentioned, you can apply for a normal installment loan by offering up an asset that you already own as collateral. The more market value the equipment has, the easier it will be to secure a large loan with favourable conditions. Once you have this liquid cash in your bank account, you can use it to further improve your farming business by:
- Taking on additional employees
- Building new structures on your property
- Repairing or renovating your existing buildings
- Paying your taxes, bills, and required permits
- Purchasing and caring for new land
- Investing in advertisements and viral marketing
- Starting a roadside market, delivery service, or food truck
- Buying new livestock, seeds, grain, and other necessities
Government Funded Farm And Agricultural Loans
Farming is a major part of Canada’s economic structure. Because of how important the agricultural sector is, the federal government has established a number of programs and services that help farmers finance or improve their businesses in different ways.
These programs and services (provided by Agriculture and Agri-Food Canada) include but definitely aren’t limited to:
- Advance Payments Program – Receive a low-interest cash advance up to up to $1,000,000. The amount you qualify for is based on the estimated value of your products and is to be repaid as you sell your products (up to 18 months)
- Dairy Farm Investment Program – Access up to $100,000 to invest in new dairy production technology or to upgrade your current equipment.
- Farm Debt Mediation Service – If your farm is struggling financially, this service can help you find the appropriate sources of counselling and mediation for free.
- Technology Transfer And Licensing – This allows for-profit organizations to commercialize various farming technologies and intellectual properties.
Check out more financial assistance programs offered by the government.
Farm Equipment Loans FAQs
What documents will I need to apply for farm equipment loans?
What can I use my farm loan for?
Can I get a farm equipment loan with bad credit?
Bottom Line
If you’re looking for a farm equipment loan in your province or territory, be sure to compare your options before applying with any one lender. You can use a loan comparison website like loans Canada to get multiple quotes from different lenders with a single application.
