Planning for equipment purchases
April 25, 2022
Planning machinery purchases and repairs is more critical than ever considering the lead time manufacturers need to produce products and the limited availability of used equipment and parts to repair your current equipment. With the capital-intensive nature of dairy farming, these decisions are one of the larger financial choices you make year after year. Choosing the right equipment can help overall productivity, and increase profitability. Many options are available for purchasing new or used equipment and should be carefully assessed prior buying.

Before heading to the dealership or browsing online, it is best to first evaluate your existing equipment. Some questions to consider include:
  1. What equipment is the most likely to require repairs in the next year?
  2. What equipment has the longest lead time with a dealer if needing a replacement?
  3. What equipment is the most critical to the operation?
  4. If a piece did fail, can it be purchased used?  Or possibly rented short-term, or completed by a custom operator until the replacement item can be obtained?  Are either of these options available on a longer-term basis?
  5. Is lack of reliability caused by unscheduled maintenance or repairs a problem?
  6. Is some of your equipment no longer necessary for the farm to function?
  7. Is current equipment capacity or productivity below what’s now required due to farm growth, or equipment technology advancement?
After assessing your machinery line and critical needs, what equipment purchases can your operation support in the projected annual budget?  Most everyone has more wants than can be handled on a cash flow basis.  So, what are your must-have equipment needs?  Engage with those you can trust early in the process, such as your lender, dealer and sales personnel.  Additionally, include your accountant if you have tasked them with giving you advice on what your operation can afford and the various tax implications of purchases.

Your local dealer is a good starting point for pricing, product specifications, trade-in values if applicable, and used equipment options. After receiving initial information, you should decide what is a realistic price you can afford, given your needs and ability to cash flow the purchase. Once you decide on a piece and a budget, you can then ask yourself, could this equipment be rented, leased, performed by a custom operator, or even shared with a neighbor to help justify the cost and increase ROI? When you are ready to start looking, be sure to check out auctions and private sellers in addition to local dealers if you are looking at used equipment. Make sure you’re dealing with reputable parties. If it is a private sale, make sure that any liens on the equipment are satisfied. Additionally, if buying used, are there any service records or performance guarantees? New or used, are there any possible tax implications? Lastly, will there be any additional needs or costs that may be triggered by this purchase?

There are many considerations to take into account when making equipment purchases. Asking questions, gathering information and doing research will help ensure you make the best decision. After deciding on a budget and piece of equipment, obtaining financing will most likely be the next step in the process.
There are several options available when it comes to financing equipment:
  1. Manufacturer financing: If the item is a product of a major manufacturer, they usually have financing available. Just be cognizant that the financing terms should fit your cash flow. Also, be aware that not using their financing may provide you a cash discount on the price, and possibly a better package.
  2. Term loan: Could be provided by your primary lender, or other financing entities that specialize in ag finance. This option allows you to take advantage of any cash discounts and purchase the equipment from any manufacturer.
  3. Cash: Is this the best use of your cash now and in the next 12 months?  You want to keep enough cash in your business accounts to pay your ongoing operating expenses. If this purchase leaves you short on cash and unable to meet current obligations, you could face fees which could cost you more in the long run than financing the purchase.
  4. Revolving line of credit: There are pros and cons to this option. On the plus side, your cash flow should not change as the payment on your revolving line is usually constant. On the other hand, you do not want to completely use your line as you may need it for unexpected cash flow needs in the future. There could be unforeseeable events, and no one knows when this could happen or the potential impact. Leaving some borrowing flexibility in your operation will help you thrive.
Now that you’ve assessed your needs, buying options and budget, it is time to finalize your search. The best option may not be the one you thought when you started your search.  Choosing new or used, dealer, auction or private, or even rent/lease or custom depends on availability, your budget, your preferences, and needs. Each option has many pros and cons and needs careful consideration.  Please reach out to your DFA Financing Loan Officer team to discuss various ways we can assist you through the process.