Financing a machinery purchase? Think twice before using operating credit
Margins are tight for many crop producers today facing per-bushel prices below breakeven point. These conditions put a premium on keeping a close eye on every penny spent and doing anything that can be done to maintain financial efficiency.
And, while it may be tempting to do so, especially when times are tight like today, it’s a good idea to resist the urge to finance big-ticket purchases like machinery and equipment using an operating line of credit versus securing separate financing…unless you absolutely have to.
Interest rates, overall costs differ
The first reason, says AgDirect Territory Manager Calvin Sipes, is cost. Interest rates and total costs are typically higher for operating lines of credit that are designed to be utilized on an annual basis versus machinery financing that’s typically drawn up for a period of several years.
“I’m not an advocate of buying equipment using operating lines. First, they generally have higher rates, so you’re paying more for that equipment in the long run,” Sipes says. “Plus, you are tying up financing that really needs to be utilized for operating expenses with an equipment purchase.”
When is it okay to use operating credit for machinery?
In some cases, though, a machinery repair or altogether new purchase isn’t part of a larger ownership strategy, therefore it may be more of a surprise to the producer. In cases like these, using operating credit may be inevitable. Sipes says it’s important to make sure the price tag isn’t high enough to erode that line of credit that’s normally reserved for things like crop inputs.
“The operating lines of credit can be for parts or a failure in a piece of equipment. If you have a maintenance issue pop up in the field that you didn’t expect and you all of a sudden have a $10,000 repair to make, that’s where operating credit can be used,” he says. “Operating lines are necessary in cases like this, but I would use them judiciously.”
Plan ahead to save
In the long run, it’s best to plan out machinery purchases well in advance and secure financing for those purchases as much as you can to avoid losing money because of financing costs, something even more critical as the premium on financial efficiency grows for producers beset by bearish markets for the crops they grow.
“Is using an operating line of credit to buy machinery a smart way to do business? That’s the question to answer. If you’re paying a percentage point higher to finance that purchase, think about your long-term costs,” Sipes says. “As margins tighten up on these farms, operators need to watch every penny. Though they are totally necessary on a lot of farms, operating lines of credit have higher interest rates because it’s just a different beast.”