Guide
Everything you need to know about financing farm equipment...
If you're thinking about getting new farm equipment, you don't necessarily need to tie up your available working capital in a big outright purchase.
Words by: Auto Trader
Published on 6 August 2018 | 0 min read
There's a wide range of different funding options that can help you acquire all kinds of farm equipment and machinery without a lump sum. Let's take a look at the different options for financing farm equipment, and their pros and cons.
Secured or unsecured business loans
If you don't have enough working capital to buy new equipment for your farm, or if you have more than one purpose in mind, a straightforward business loan may be a good option. Broadly speaking there are two kinds of business loans, secured and unsecured, which refers to whether or not you need to have security (or collateral).
As a farmer you probably already have assets you could use to secure a loan, such as commercial property, vehicles, and machinery. Using items like these, you might be eligible for a secured loan, which means the value of the loan is based on the value of the item (you can usually borrow around 50% to 75% of resale value). If you stop making payments, the lender can sell the asset to get their money back. This type of loan is also known as asset refinance, because you're 'unlocking' the value of assets you already own. In this way, you can use valuable items that your farm already owns to get a loan to help you buy new equipment. On the other hand are unsecured business loans. This type of loan doesn't require any security, so the amount you can borrow depends on your turnover and the overall financial position of your farm. Lenders will often base their loan amounts on your turnover - for example, you might be able to borrow 1-2 months worth. With no assets involved, there are no valuations needed, so unsecured business loans are almost always quicker to arrange. However, interest rates tend to be higher because the lender carries most of the risk, and you'll normally need to give a personal guarantee. This means if your business can't pay, it'll be your personal responsibility, so you should think carefully and speak to a lawyer before agreeing to one.
As a farmer you probably already have assets you could use to secure a loan, such as commercial property, vehicles, and machinery. Using items like these, you might be eligible for a secured loan, which means the value of the loan is based on the value of the item (you can usually borrow around 50% to 75% of resale value). If you stop making payments, the lender can sell the asset to get their money back. This type of loan is also known as asset refinance, because you're 'unlocking' the value of assets you already own. In this way, you can use valuable items that your farm already owns to get a loan to help you buy new equipment. On the other hand are unsecured business loans. This type of loan doesn't require any security, so the amount you can borrow depends on your turnover and the overall financial position of your farm. Lenders will often base their loan amounts on your turnover - for example, you might be able to borrow 1-2 months worth. With no assets involved, there are no valuations needed, so unsecured business loans are almost always quicker to arrange. However, interest rates tend to be higher because the lender carries most of the risk, and you'll normally need to give a personal guarantee. This means if your business can't pay, it'll be your personal responsibility, so you should think carefully and speak to a lawyer before agreeing to one.
Contract hire
Contract hire, which is also called leasing, gives you a little bit more flexibility when you don't necessarily want to get equipment as a long-term investment. Equipment leasing is essentially a long-term rental of an asset, so you don't have to pay a large amount of cash upfront, but you can use the equipment right away.
With eqipment leasing you'll pay fixed monthly instalments to the lender. Payments can usually be offset against profits because they count as a business expense, which may improve your tax position (although you should discuss the details with your accountant). One of the benefits of leasing is that maintenance is often included. The terms vary, but usually equipment can be leased for up to 5 years. As soon as the contract comes to its end, you'll have to return the equipment. It allows you to start a new lease and choose upgraded equipment. Some lenders even give you the option to pay the remaining amount and purchase the asset after your lease.
With eqipment leasing you'll pay fixed monthly instalments to the lender. Payments can usually be offset against profits because they count as a business expense, which may improve your tax position (although you should discuss the details with your accountant). One of the benefits of leasing is that maintenance is often included. The terms vary, but usually equipment can be leased for up to 5 years. As soon as the contract comes to its end, you'll have to return the equipment. It allows you to start a new lease and choose upgraded equipment. Some lenders even give you the option to pay the remaining amount and purchase the asset after your lease.
Hire purchase
Another kind of agricultural asset finance is hire purchase. You'll acquire the asset by paying instalments over time. The main difference to leasing is that once you've paid the instalments, you'll own the asset.
Hire purchase allows you to buy equipment, but in more affordable monthly payments rather than a lump sum. At the end of the term you'll legally own the asset. This means you'll have valuable items to resell later if you don't need them anymore. Bear in mind, though, that you'll have to take on maintenance and insurance. In summary, this type of finance can be seen as a long-term investment, whereas leasing gives you more of a short-term option.
Hire purchase allows you to buy equipment, but in more affordable monthly payments rather than a lump sum. At the end of the term you'll legally own the asset. This means you'll have valuable items to resell later if you don't need them anymore. Bear in mind, though, that you'll have to take on maintenance and insurance. In summary, this type of finance can be seen as a long-term investment, whereas leasing gives you more of a short-term option.
Final thoughts
It can be tricky to assess the best way of getting new equipment for your farm. Funding Options can have a look at your situation and source the right finance for any equipment, whether you want to purchase or lease new machinery.
Questions you should ask yourself before deciding on an option are: Do I need the asset very quickly? Do I want to acquire assets as an investment? Once you've narrowed down some key points, you'll have a clearer idea of what you're looking for.
Questions you should ask yourself before deciding on an option are: Do I need the asset very quickly? Do I want to acquire assets as an investment? Once you've narrowed down some key points, you'll have a clearer idea of what you're looking for.