What you need to know before Financing New or Used equipment

One of the biggest decisions that farm owners face is deciding to buy either used or new equipment. The next question is then how to finance these major purchases. Before carefully analyzing these two decisions, there is one criteria that will quickly put your purchase decision in one camp or the other. If you are looking for a tractor in the under 60 hp market, then your better choice is usually to buy a newer tractor. If you are looking in the larger tractor size over 60 hp, then the decision becomes more complicated.

Defining Your Ag Equipment Needs

60 hp tractors are in a competitive market where if you wanted to buy a used one, the odds are the tractor is going to be extremely well used. By buying a new 60 hp tractor you get not only the warranty, and the service agreements, but you are also getting the best technology and a tractor that you can depend on for it least the first several years.

The general decision-making criteria for buying your used equipment and financing it looks as follows:

1. What size of equipment or tractor do I need? Bigger is usually better.

2. What special features do I want and what are the priorities for those features? More features are almost always better.

3. What brand is the easiest brand to have service port to get parts for in my area? The brand that you can get serviced and has a good reputation as well as high resale value is the way to go.

Once you have answered these questions with a rank of priorities that you are interested in, then and only then is it a good idea to consider whether new or used and what kind of financing, if any, you should use.

The reason to establish these priorities, and in that order, is if you buy a piece of equipment simply because it is a good deal or you can get good financing on it, and it does not allow you to perform all of the functions that you need a tractor for, then you will be in a position of needing to spend more money in the end to get what you need.

Determining How Much Tractor, Combine, Equipment You Can Afford

What it comes to buying tractors and many varieties of agricultural equipment the general recommendation is to get the biggest tractor you can possibly afford. Also, get the most features you could possibly want because you are more than likely going to have that tractor or ag equipment for a minimum of five years, and often 10 or more years. Think not only about your current business but the ways you will grow over a decade.

The specifics about how to calculate whether buying a tractor new or used and financing it involves a couple of terms from the financial world. We need to understand the fixed costs of owning a tractor and the variable costs. The fixed costs include your financing, depreciation and interest expense. Accountants will usually enforce straight line depreciation on agricultural equipment. The US farmer has an advantage where they can use 150% bonus first year depreciation on their equipment, though this may be repealed at any time. The US tax laws require that machinery for agricultural purposes be depreciated under the seven-year property classification.

Know Your Tractor Costs

Variable costs for equipment include your fuel use, oil, driver expense, repair and maintenance, and any ancillary expenses that the tractor requires.

A professionally run farm will have almost all of these costs  for the tractor in their farm management system or in some form of bookkeeping. When you have these numbers available for evaluating your current tractor use and costs, then it becomes simple mathematics to decide whether or not the new or used tractor you wish to buy will benefit you. An assumption with a newer piece of equipment is that you will have less maintenance than your current piece of equipment. The only way that this can be 100% true is if you buy a new piece of equipment with a maintenance agreement.

The primary advantage for buying new equipment is that it will tend to be more efficient than older equipment, and it will also allow you have warranty coverage for a number of years. Your warranty coverage is almost like money in the bank compared to buying used equipment. The largest benefit of buying new or very well inspected and maintained used equiment is that it gives you a maintenance-free envelope of ownership. With tractor repair costs being a substantial portion of tractor ownership, the benefit of buying either new or nearly new equipment becomes both an issue of saving money as well as saving the costs of downtime.

Calculating Farm Equipment Break Even Point

You may also want to calculate a breakeven analysis on how many acres or hectors will be required to pay for the tractor. The formula for calculating that is as follows:

Contract Rate or CR (x)  = Avg Fixed Cost + Avg Variable Cost (X)

Break Even Acres = X = AFC/(CR-AVC)

The contract rate is how much it would cost to contract out your farming for the acreage.

Though this formula might look a little bit frightening, it is extremely easy to calculate what your breakeven number is for a tractor purchase. Once you have decided that the tractor or the agricultural equipment meets this breakeven analysis, and you have either the credit or the cash to buy the tractor that you want, then it is time to shop with the list of requirements you developed from the top three requirements defined earlier

Buying a tractor or piece of agricultural committee is just the beginning. In future articles we will look at options for how you can maintain your next equipment purchase.