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 finance big-ticket purchases like machinery and equipment using an operating line of credit unless you absolutely have to.
Interest rates, overall costs differ
Cost is the first reason using operating credit to finance equipment is unwise. 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.
Using operating credit for machinery can be more expensive in the long run. Unless true cash is used to purchase equipment, farmers need a payment structure that more appropriately represents the intent and useful life of the asset being purchased. Financing machinery with an operating line can lead to overspending because the debt associated with the asset being purchased isn’t clearly identified. This disrupts the structure of an operation’s balance sheet and makes it difficult to track the true costs and debt retirement of an investment. With no set repayment structure like longer-term loans, farmers can end up owing more on equipment than it’s worth when it is time to retire or trade the asset.
Other things to avoid
In addition, tying up financing that is needed for operating costs can lead to trouble down the road. Farmers can potentially run out of operating credit before harvest and have to pass up a good opportunity because they don’t have cash or credit available.
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.
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