There’s no doubt that having the right equipment is one of the most important parts of your business. Apart from the land you own, your farm machinery is probably your next biggest investment. So, you need to be well-informed about your farm equipment finance options.

There is a fine line between overcapitalising and buying equipment you don’t need (or before you need it) and being left in the lurch when your equipment breaks down.

In this blog, I will share some advice and tips to help you:

• Deciding when to replace your equipment
• Develop a capital budget to fund your equipment replacement
• Choose the right type of equipment finance

Repair or Replace?

Look after your equipment

It might sound overly simple, but looking after your equipment is an important starting point. Keeping up to date with maintenance and addressing problems or concerns as they arise, will help you get the most out of your equipment. You’ll reduce lost time and your production should be more efficient. By maintaining your equipment, you can also control production costs and maximise operating profit.

No matter how busy you are, you should make time for maintenance. Skipping it because you ‘don’t have time’ will probably cost you more time, money and stress down the track.

Repair vs replace?

Even if you look after your equipment to keep it running smoothly and reliably, you’re likely to need repairs at some stage. There are many variables, including the age and type of equipment.

Sometimes you’ll need to weigh-up the cost of repairs against the cost of replacement. Costs are more than just the dollar figure on the repair quote or new equipment.

Things to consider:

• Whether there is a warranty on the equipment?
• Do you have access to, and can you afford, the trained technicians required?
• How old is the equipment? Is there a chance this repair is just a bandaid and you’ll be up for more repair costs in the future?
• Is this the first repair? If it’s not, perhaps it’s not worth the risk of the machinery breaking down during a crucial period like seeding or harvest.
• If it’s an older piece of equipment, could upgrading now provide production or efficiency benefits that would improve your financial position?

Consider your financial position

If the answers to the questions above have you thinking that new equipment is the answer, you’ll need to look closely at your farm finances. This is probably a good time to chat with your bookkeeper, accountant, broker or other trusted advisors, who can help explain how to get the best farm equipment finance deal.

Some questions to ask include:

• How much working capital do you have?
• What is your cash flow situation?
• What is your debt-to-asset ratio?

If you already own the equipment, perhaps there is a trade-in amount? But will you need to borrow? The repayments will affect your working capital and increase your debt-to-asset ratio.

You need to consider these issues to determine whether repair or replacement is the best financial decision.

Develop a capital budget

If you’ve decided to replace equipment, there are a few steps to consider before you sign a contract.

The financial reports we prepare during tax time aren’t that useful for making decisions about your farm machinery and equipment. Even if you feel you’re on track and meeting your current borrowing obligations, you need to understand the impact on your farm’s equity in the long term.

That’s where a capital budget comes in.

The first step is to look at the age, current market value and likely replacement schedule for all your equipment.

Once you’ve worked out what equipment or machinery you require in the next 8-10 years, you’ll need to estimate the cost of replacement.

What is a good annual figure to spend on equipment?

Now, how are you going to finance that replacement? Whether you use your own funds, borrowing, or a combination, the key is to minimise annual outlays and keep them consistent. Monitor your repayments to ensure they fall within whatever risk indicator you decide for your business. This might be a percentage of revenue (less than 10% is a good figure) or $ per tonne of crop produced.

The last step is to project your capital expenditure and cash flow. Then create a budget over the next 10 years including outlays to replace and maintain equipment.

With a capital budget strategy, you can:

• Ensure you plan equipment replacements and upgrades to increase efficiency and reduce risk
• Reduce the cost and risk of annual equipment replacements
• Even out cash flow

Choosing the right farm equipment finance

Body:  You’ve done your sums, discussed the options with your advisors and developed your capital budget.

The next step is choosing the right finance option for you and your business.

There are several types of asset finance, you should seek advice from your advisors as some of these options may not suit your business.

Some final thoughts on farm equipment finance

Remember, it’s a tool, not a toy

No matter what equipment or machinery you need, it’s a tool of the trade. You need to choose equipment that’s right for your business. Not just because it’s what your neighbour has, or you’ve been enticed by unnecessary bells and whistles.

Your machinery only has value for the work it can do for your business, so make sure you only invest in equipment that ultimately contributes to your business.

Keep your debt affordable

You need to be smart about the debt you take on. If you need the machinery to ensure you get the best harvest outcome but won’t have the funds to pay for it until after harvest, make sure you structure your loan appropriately. Look at staggering your repayments and paying more once you’ve been paid for your produce.

But we all know farming is often unpredictable. Make sure you don’t over commit or overestimate your yield.

And while we all like to know we have some money tucked away for emergencies, it’s often more efficient to use any extra funds you have, to reduce your debts.

Minimise your tax and maximise benefits

When you’re taking out your loan, make sure it’s set up so you own the loan. You want the equipment to sit on your balance sheet so you can depreciate it from the start. This also means you can include the GST in your loan, but your repayments won’t involve GST.

Talk to the broker in your corner

As I mentioned at the start, you should talk to your broker or advisor right from the start. Get them involved early in the process so they can help you with research and advice about your farm equipment finance. There’s no point wasting your time making enquiries about new machinery or loan options only to find out they don’t meet your financial requirements.

Your broker can make sure you get the right finance and set up the right repayment schedule for your requirements. They’ll be able to organise options like timing repayments to match your seasonal cash flow.

Over to you

If you liked this article, we’d love you to share it. And if you’ve got any comments or questions about farm equipment finance, please get in touch.