This is the time of year when producers are evaluating their equipment needs as they prepare for harvest. For some, this will mean purchasing new equipment. Vince Bailey, senior vice president of ag lending at Farm Credit Mid-America, says the practice of paying for that equipment with your operating line of credit is not a good idea, “When margins are tight, like they are right now, we really have to resist the temptation to dip into that operating line of credit to buy farm equipment.”
Bailey says such a practice can put you at risk if interest rates rise, “Interest rates on operating loans are generally variable rates and can rise rapidly, and this can add a good deal of volatility into your operation.” He said rates on operating loans may be lower than fixed rate loans for equipment, “but you really need to be careful in this area.” He urged producers to take advantage of the stability of a longer term, fixed rate loan when making a large capital purchase like a tractor or combine.
Longer term, this can impact the overall credit worthiness of your operation, “Financing equipment with an operating line can lead to elevated or oversized operating lines of credit because the debt associated with the asset is not clearly identified. This disrupts the structure of an operations balance sheet.” He said this can make tracking the true cost of debt retirement of an investment difficult.
Farm Credit Mid-America has a variety of resources and insights available on this and other issues, visit