If you need to get your hands on a tractor, a reaper, a cultivator, or any other type of agricultural equipment, but you don't have the cash available for it (or don't want to deplete your capital) it helps to have good credit and 2 or more years in business.
If you don't have both of those things, it's going to be harder and more expensive to procure financing. How much harder depends on your situation.
Special Note: To find out what your costs would be to finance equipment, click here...
Why is Equipment Financing So Hard for New Farmers?
Lending companies make loans for the same reason you do (or are about to do) farming. If you grow corn, and it costs you $2.00 to grow a bushel of corn, you hope you can sell it for about $4.00 a bushel. If the price of corn falls, you know you're going to be hosed, so you probably take out an insurance policy against the price of corn before you even grow it.
Lending is no different. If an finance company lends money to a business that has a 36 percent chance of going out of business and not paying the payments on their equipment, the finance company has to make sure to charge enough money to both cover the costs of the 36 percent of loans that aren't going to be paid in full, and hopefully have enough left over to make a profit.
That 36 percent number didn't come out of randomness - that's what percent of businesses fail within 2 years, so if you're new in business, expect to pay a premium.
New Business Equipment Leasing Rates for Farmers
The equipment financing cost for a new farmer depends. Financing is going to be expensive for a new farmer with good credit. It's going to be really expensive for a new farmer with bad credit.
If you're new in business, and you've got good credit (around 675 credit score) but no collateral, you can usually get up to $100,000 in financing for not too outrageous of an amount. That $100,000 might run you roughly $2,750 a month on a 5-year term.
If you've got bad credit (less than a 620 credit score), you'll need cash and collateral, and the payments will be significantly higher - that same $100,000 for a new business with challenged credit would run $3,500 a month or more, depending on the situation. I know it sounds outrageous, but from a lender's perspective, we already talked about how it's really risky to lend to a new business - lending to a new business where the owner has had trouble making payments in the past sounds about as safe as smoking next to a fireworks stand.
How Much Does it Cost to Lease Farming Equipment With Bad Credit?
If you're not new in business, but you've got credit challenges, depending on your business situation the rates won't be pretty, but the cost to lease farm equipment with bad credit for an existing business can sometimes be better than for a new business with bad credit.
If your credit isn't perfect, but not totally trashed (think a 640 credit score or something) you can probably get a loan with no collateral and a $50,000 machine might run you $1,550 a month or so on a five-year loan.
If your credit is bad, but you've got a sizeable operation (over $500k in annual revenues and more than 6 employees) you could finance that $50,000 piece of machinery over 4 years for $1,775 per month with a 10-15% security deposit.
If your credit is bad, and you're smaller than the operation described above, interest rates are about the same as for a new business with bad credit, $2,350 a month for a $50,000 equipment loan, plus you'll need 50% down or collateral.
Incidentally, while we talk about payments on a 5-year loan, we should mention that in the worst credit scenarios (the ones with really high rates) we would tell you financing over 5 years is a really stupid thing to do unless you have no other options.
That $50,000 loan over 5 years at $2,350 a month end up costing a total of $141,000 over the life of the loan - $91,000 of which is finance charges. If you cut the loan to 30 months, the payment is higher - about $3,150 - but the total payments are $94,500 - saving you $46,500 - almost the entire cost of the tractor.
For the lower cost options the difference isn't nearly as jarring between shorter term and longer term, but when we talk to you about financing options, we'll show you the differences in total payments between short and long term financing for anything we present and help you choose the plan that is best for you.
If you are new in business or have bad credit but need to finance or lease farm machinery, we're happy to help you understand you options.
Please contact us or give us a call at (866) 631-9996.