Agriculture & Farming Equipment Financing & Leasing

Background: Farming Loans

Farmers and agricultural land owners operate in a seasonal business. While waiting for the season to start, their high-end specialty equipment is locked away in a barn. That scenario, can however be changed and optimized through a farming loan. In this type of loan, the farmer uses the value of the equipment as collateral to gain funds that can then be deployed into other business uses. Ultimately, the farming loan can thus be distilled as such: a secured loan that enables the established farmer to unlock additional value in the business or the new farmer to initiate his/her business.

How the Loan Works

The farm loans have several similarities to other forms of secured loans such as car or auto loans, but also a few key differences. The loan itself is secured against the value of the equipment that is being bought and/or posted as collateral. This means that in the event that the borrower fails to repay the loan, the lender can seize the assets and sell them on the open market to recoup their losses. However, given that the farming loan is slightly riskier owing to the seasonal, weather-dependent nature of the farming industry, the loans are also priced higher than ordinary auto loans. Lastly, they typically have longer terms as well, which means that the farmer may pay less back in principal per month, but also has to pay a higher interest amount over the term of the loan.

Steps before Obtaining a Farming Loan

While several financial institutions and credit unions offer farming loans, there are some critical factors to consider and evaluate before undertaking a farming loan.

Explanation of Key Deliverables

It is pertinent at this point to explain what is meant by some of the terms above, particularly for first-time borrowers.

1. Balance sheets are a snapshot of the company’s assets at a given point of time less the liabilities (debts) owed to other counter-parties. The remaining equity is the value of the business left for the owners.

2. Income statements are documents which show how much revenue was generated via the farming operations less the expenses that were incurred in generating that revenue. The residual amount is the net profit (or loss if the number is negative).

3. Cash flow statements are documents that calculate and show how much cash is in the business at the current point of time.

Uses of Farming Loans

Farming loans can be used by farmers for a multitude of diverse reasons. Some of these are as detailed below:

Advantages of Farming Loans

The farming loan offers several advantages for borrowers including:

1. Lump-sum Payment: At the outset, the farmer receives a lump sum payment to initiate operations with. Over the life of the loan, this payment is then paid back with interest, while the farmer can continue making revenues in the interim.

2. Longer Loan Terms: With the longer terms typically offered by the farming loans, farmers reduce their monthly cash outflow, enabling them to retain more cash for themselves from their operations.

3. Multi-purpose: As evidenced from the paragraph above, these farming loans can be deployed towards a versatile range of uses, providing the farmer with additional flexibility for how to allocate his/her funds.

Drawbacks of Farming Loans

There are however, some considerations to be made before undertaking a farming loan. These include:

1. Higher Rates: Because of their longer terms and relatively riskier business model, farming loans are priced higher than other commercial loans, all other things equal. This implies higher interest payments over the life of the loan.

2. Collateral: If the borrower fails to repay the funds acquired, the lending institution can seize the assets (in this case, the equipment bought) to recoup their losses. For a farmer, this could possibly be a major obstacle to continuing their business.

3. Alternative Options: The farming loans are rarely cheaper than other options such as grants, government loans or micro-loans.

What the Numbers Say

The following chart shows the size of the agricultural equipment manufacturing industry in Canada. As can be seen, the industry has stayed largely stable over the past few years, reflecting the consistent demand of farmers to replenish their equipment.

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