Depending on the size and debt level of the farm, farm equipment has become critical in modern farming processes, but the high costs can be a significant barrier for many farmers. This leads to the employment of farm equipment financing to support farmers to get the right machinery without being compelled to endure the hefty costs. This blog explores the various types of farm equipment financing available in Australia, the advantages of these options, and how one can proceed to select the correct option in the process.
Understanding Farm Equipment Financing
Farm Equipment Financing is a kind of financing that deals with the provision of funds required for purchasing farm equipment.
Because farm equipment financing or machinery/asset financing is specifically for the purpose of paying for farm machinery and equipment, it’s pretty straightforward as to where it is put to use. This may include tractors and harvesters, irrigation and milking equipment and others. As a result of financing, the cost is available to the farmers in instalments which makes it easier for the farmers to make an intending investment without straining their cash flow.
Categorisation of Farm Equipment Financing
1. Chattel Mortgage
The type of security that is applied to a chattel mortgage is the purchased equipment itself. This type of financing enables farmers to borrow up to the full cost i.e., 100% cost of the equipment, sometimes with no deposits at all. The key benefits include:
- Lower Interest Rates: Due to the security offered on the asset, interest rates on the receipt of a loan are usually lower than the unsecured loan.
- Tax Benefits: The farmers can also deduct the depreciation and the interest costs under section 179 in cases where the equipment to be used is applicable for business use at least 50% of the time.
- Flexible Payment Options: Balloon payments are some of the ways of reducing monthly payments so that a reasonable amount is paid every month.
But if the repayments are not made, then the lender enjoys the legal option of regaining the equipment.
2. Hire Purchase Agreement
In the case of hire purchase, farmers make periodic payments i.e., instalments, for the use of the equipment and on meeting the agreed down payment, the ownership of the equipment shifts to the farmers. Key features include:
- Flexibility: Some of the agreements allow for deposits to lower interest rates and the equipment can sometimes be returned mid-term if it is no longer required.
- Ownership Transfer: Notice that ownership of the product passes to the consumer after the last instalment has been made.
The major disadvantage though is the fact that the farmers do not fully own the equipment until they complete the last payment thus constraining its application.
3. Equipment Lease
An equipment lease refers to a kind of contractual agreement that lets farmers obtain equipment and use the same while repaying it in instalments but not owning it. The benefits include:
- No Deposit Required: Leases are generally not a form of deposit, and you won’t have to make an upfront payment.
- Fixed Costs: Fixed interest rates and repayments aid in budgeting and cash flow management.
- No Collateral Needed: There is no collateral as such, but the leased equipment acts as a security measure.
The flip side is that it attracts a higher interest rate than secured loans and could here involve early reimbursement fines.
How to Choose the Right Financing Option
Choosing the best financing option depends on several factors:
- Collateral Availability: If you have assets which you are willing to offer as security, the benefit of a chattel mortgage is the lower interest rates.
- Equipment Usage: In the short-stint or when the operational requirements need to change often, leasing could prove to be the suitable solution.
- Tax Considerations: Weight the taxes in each of the financing kinds; consult with a professional.
- Cash Flow Management: Subsequently consider the cash flow to decide whether you could afford to pay higher amounts of monthly repayments or whether you are more suited for a long-term loan that comes with smaller payments to be made.
Wrapping Up,
Farm equipment loans have proven to be a useful means of reducing the financial pressure of Australian farmers who use the funds to purchase equipment they need for their harvesting processes. When the various types of financing have been well understood as well as focusing on the needs and characteristics of the farming business, a good decision can be made that will help its operations to grow and be successful. If you are in search of a trusted farm equipment finance provider, KG2 Australia will be happy to assist you with the correct farm equipment finance choice. Contact KG2 Australia today!
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