By Caitlin Keck
Once you’ve decided on a new strip-tillage equipment purchase, work with your lender to determine the best financing options for your farm. We sat down with Gabe Jarnot, SVP Business Development at Northland Capital, and his team to discuss financing challenges and solutions facing farmers today.
Here are 4 creative financing solutions to consider when planning for a new equipment purchase.
1. Determine your strongest cash flow period, and plan your payments accordingly.
2. Consider an equipment lease, in addition to traditional methods of equipment acquisition, to put less strain on working capital.
3. Communicate to your lender why transitioning to strip-till is the best option for your operation.
4. Research local and state programs that may provide low-interest loans or grants for farmers focused on conservation, water quality and nutrient stewardship.
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Low commodity prices is one of the greatest challenges farmers face when considering significant changes to their operation. However, a solution to this challenge is determining the right payment structure.
Jarnot explains, “The number one financing issue farmers face today is working capital; cash flow is number two. With low commodity prices, timing of payments is critical to managing cash flow.”
When purchasing equipment in the spring with an annual payment schedule, the next annual payment would then be due the following spring along with many other input cost payments. Think about your strongest cash flow period, and work with your lender to structure payments accordingly.
Advantages of a Lease
In addition to payment structure, farmers should consider whether or loan or lease is the best fit for their new equipment purchase.
“With working capital at a premium in the current farm economy, farmers need to ask themselves, ‘what is the value of my cash and where is the best place to deploy my cash,’” remarks Jarnot. “To properly compare a loan versus lease option, you need to consider the present value of all cash flows to determine your true cost of acquisition.”
Northland Capital is seeing more farmers use leases right now. Jarnot encourages farmers to look at all their options — cash, local lender and leasing. Farmers are often able to get into a lease with less cash upfront than traditional lending. While leases can be more flexible in payment structure, they can also help relieve pressure on local borrowing lines.
“The biggest motivation for a lease is cash up front, as there are more favorable terms and less strain on working capital,” Jarnot says.
Finding the right lease may be as simple as working through the equipment manufacturer. Leasing programs from OEMs may be able to offer more favorable terms than a lender with no manufacturer relationship.
“Leasing companies aligned with manufacturers have a better understanding of the equipment and how it will help benefit your operation,” said Gabe. “It will be a smoother process, and farmers may get better terms that help them with cash and cash flow.”
Helping Your Lender Understand the ROI
In strong economic times, farmers’ financial metrics may be able to speak for themselves. Aside from an understanding of assets, liabilities, and net worth of the operation, farmers must be able to communicate their need for the equipment purchase with their lender.
“We need farmers to be transparent with their lenders. Understand your financial picture before approaching your lender,” commented Gabe. “If you don’t have good answers, it makes lenders unsure.”
In addition to communicating the current financial picture, be ready to articulate the return-on-investment of the new equipment purchase. To help you plan your ROI story, ask yourself these questions:
- Will I be able to eliminate passes across the field?
- How many less hours will I be putting on my tractor(s)?
- Can I save on labor costs as a result of this new equipment?
- Am I able to sell equipment no longer needed?
- What are my potential fuel savings?
- What is the value of reduced erosion and nutrient loss?
- Will I be able to save on fertilizer?
- Can I eliminate other fertilizer application costs?
- Will I have income from offering custom services to my neighbors?
Use the information you gather from the previous questions to tell your lender why your new equipment purchase is a good business decision.
Low-Interest Loan and Grant Programs
In addition to considering their loan and lease options, farmers may also want to research local low-interest loan and grant programs. There are a number of states, counties and watersheds that offer programs to assist farmers focused on conservation and nutrient stewardship practices. The purchase of new strip-tillage equipment may qualify for some of these programs. A few examples include:
The Environmental Quality Incentives Program (EQIP) provides financial and technical assistance to agricultural producers to address natural resource concerns and deliver environmental benefits such as improved water and air quality, conserved ground and surface water, reduced soil erosion and sedimentation, and improved or created wildlife habitat. Through EQIP, NRCS provides agricultural producers with financial resources and one-on-one help to plan and implement improvements, or what NRCS calls conservation practices.
The Minnesota AgBMP Loan Program is a water quality program that provides low-interest loans to farmers, rural landowners, and agriculture supply businesses. The purpose is to encourage agricultural Best Management Practices that prevent or reduce runoff from feedlots, farm fields and other pollution problems identified by the county in local water plans. The borrower proposes a project to the local county. If the borrower meets state eligibility requirements and the project addresses local water quality priorities, the county approves the project and assists them in locating a cooperating banker.
The Iowa Conservation Stewardship Program (CSP) helps farmers build on their existing conservation practices. Farmers can work with their local NRCS to design an individual CSP plan. CSP offers annual incentive payments, starting at $1,500, for installing practices outlined in the CSP plan. CSP also offers bundles for farmers to select a suite of enhancements to implement allowing them to receive a higher payment rate.
The New York Climate Resilient Farming (CRF) Grant Program helps farms reduce their operational impact on the environment. Funded through the state’s Environmental Protection Fund, county soil and water conservation districts apply for the competitive grants on behalf of farmers.