Margins are tight for many crop producers today facing per-bushel prices below their breakeven points. 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.
While it may be tempting to do so, especially when times are tight, it’s a good idea to resist the urge to use your operating line of credit instead of a farm machinery loan to purchase farm equipment and other big-ticket purchases unless you absolutely have to.
Interest rates and overall costs differ
The first reason to avoid using operating credit for equipment purchases is cost. Operating lines of credit typically carry higher interest rates and are designed for short-term, seasonal expenses. In contrast, farm machinery loans are structured for longer terms and better align with the lifespan of the equipment.
Using operating credit for long-term assets like machinery can lead to overspending and obscure the true cost of ownership. Without a clear repayment structure, it becomes difficult to track debt and manage your balance sheet effectively. This can result in owing more on equipment than it’s worth when it’s time to trade or retire it.
Don’t Tie Up Operating Capital
Tying up your operating credit in equipment purchases can also limit your flexibility. If your credit is maxed out before harvest, you may miss out on timely opportunities or struggle to cover essential input costs. Operating lines are best reserved for short-term needs like seed, fertilizer, and fuel—not capital investments.
As margins continue to tighten, it’s critical to keep a close eye on your balance sheet. Paying even a slightly higher interest rate on a long-term purchase can have significant long-term consequences. Using operating credit for equipment is a risky move that can strain your financial health.
Match Financing to Asset Lifespan
A key principle in farm financial management is aligning the type of financing with the asset’s useful life. Farm machinery loans offer structured repayment terms that reflect the long-term value of the equipment, helping preserve cash flow and maintain a healthier financial position. This ensures that the cost of the asset is spread out over the years it contributes to your operation.
Plan for Flexibility and Resilience
Keeping your operating line available for short-term needs builds flexibility into your financial plan. This allows you to respond to unexpected expenses or take advantage of market opportunities. Separating short-term and long-term financing not only improves financial clarity but also strengthens your operation’s ability to weather economic fluctuations.
As margins tighten on a lot of farms, operators need to keep careful track of their balance sheet. Operating lines of credit are designed to accommodate short-term purchases like input costs and therefore have a higher interest rate. Paying a percentage point higher to finance a long-term purchase can have unseen long-term costs. Using operating credit pay for equipment is risky business and farmers should consider other options.
Looking to learn more about the different farm machinery loan or operating loan options that Farm Credit Mid-America offers? Connect with our team today and apply for a loan to get started.
Loans subject to credit approval. Additional terms and conditions may apply. Farm Credit Mid-America is an equal opportunity lender.
