Farmers face unique financial challenges, such as fluctuating income, seasonal expenses, volatile costs, and significant investments in equipment and infrastructure. Access to appropriate financing options helps manage these challenges and supports sustainable farm operations. Two primary financing options available to farmers are agriculture lines of credit and agricultural loans. Both come with their own set of advantages and disadvantages, but what are the differences between these two financing options, and which is the best one for you? 

Agriculture Lines of Credit

What is an Agriculture (Operating) Line of Credit?

An agriculture line of credit is a revolving credit option that allows farmers to borrow, repay, and re-borrow funds up to a specified limit. It offers flexibility for managing short-term expenses and working capital needs.

Key Features of Ag Lines of Credit

• Revolving Credit: Allows funds to be borrowed, repaid, and reused multiple times within the credit limit.
• Flexibility in Borrowing and Repayment: Borrowers can access funds as needed and repay them when it suits their cash flow.
• Short-Term Use: Typically used for short-term operational expenses like seed, feed, fertilizer, and more.

Advantages of Lines of Credit

• Financial Flexibility: Provides financial flexibility for seasonal or fluctuating expenses, allowing farmers to access funds when needed.
• Interest on Usage: Interest is charged only on the amount of credit used, not the entire credit limit, helping to manage borrowing costs.
• Cash Flow Management: Helps bridge gaps in income and manage cash flow during low-income periods. 

Disadvantages of Lines of Credit

• Higher Interest Rates: May have higher interest rates compared to traditional loans, increasing the cost of borrowing.
• Periodic Renewal and Re-qualification: Requires periodic renewal and re-qualification, which can be time-consuming and stressful.
• Lower Borrowing Limits: Often have lower borrowing limits compared to agricultural loans, potentially restricting available funds. 

Agriculture Loans

What is an Agriculture Loan?

An agriculture loan is a lump sum of money borrowed and repaid over a fixed term. These loans are generally used for long-term investments and significant purchases.

Key Features of Ag Loans

• Lump Sum Financing: Provides a single lump sum that is repaid over a specified period.
• Fixed or Variable Interest Rates: Loans can have either fixed or variable interest rates, offering predictable repayment schedules or potentially lower initial rates.
• Used for Long-Term Investments: Suitable for substantial investments like purchasing farms, land, equipment, or infrastructure improvements.

Advantages of Ag Loans

• Lower Interest Rates: Often have lower interest rates compared to lines of credit, reducing the overall cost of borrowing.
• Predictable Payments: Fixed repayment schedules provide predictable monthly costs, letting you plan your finances without any surprises  
• Facilitates Large Investments: Allows for larger, long-term investments in farm operations and equipment, supporting growth and development. 

 Disadvantages of Ag Loans

• Less Flexibility: Fixed repayment schedules offer less flexibility compared to the revolving nature of lines of credit.
• Collateral Requirements: May require collateral or a down payment, increasing the initial financial burden.
• Prepayment Penalties: Some loans may impose penalties for early repayment, limiting financial flexibility. 

Choosing Between Ag Lines of Credit and Loans

Factors To Consider

• Purpose of Financing: Determine whether the need is for short-term operational expenses or long-term investments.
• Amount Needed: Evaluate the borrowing limits of each option and how they align with your financial requirements.
• Interest Rates: Compare the interest rates offered by each option and their impact on overall costs.
• Flexibility and Cash Flow: Assess your need for flexible repayment terms and how each option affects your cash flow. 

Discuss Your Options with an Agricultural Lender

Consult with an agricultural lender who can provide personalized advice and help you understand the best financing options for your farm's specific needs. They can assist in tailoring a financial strategy that incorporates both lines of credit and loans or help you choose the financial option best for you.

Consider Both Financing Options

You don’t have to restrict yourself to just one type of financing. In many cases, using both agricultural lines of credit and loans in combination can provide the best of both worlds. Lines of credit can cover short-term, flexible needs, while loans can support larger, long-term investments. This combined approach can enhance financial stability and support sustainable farm growth.

Ag Lines of Credit vs Ag Loans

Agriculture lines of credit offer flexibility for short-term needs with revolving credit, whereas agricultural loans provide a lump sum for long-term investments with fixed repayment schedules. Understanding these differences and working closely with an agricultural lender can help you select the best financing solution to ensure your farm's success.  

Have questions about the perfect loan for your business? Contact us today to see how we can help you. 

Choosing the right agricultural lender can significantly impact the success of your farming operations. Agricultural (Ag) lenders play a crucial role in providing the financial support necessary for purchasing equipment, expanding operations, and navigating the unique financial challenges of farming. This blog will guide you through the essential factors to consider when selecting an agricultural lender, ensuring you make an informed decision that supports your farm's goals and growth. 

The Role of Agricultural Lenders in Farm Success

Agricultural lenders are more than just financial institutions; they are partners in your farming business. They provide the capital needed to invest in new technologies, land, and infrastructure, which can improve productivity and profitability. A good agricultural lender understands the cyclical nature of farming, including the seasonality and specific financial challenges that come with it. They serve as a confidant and someone you can bounce ideas off of. By choosing the right lender, you can secure the necessary loans and products that align with your farm's cash flow and growth plans.

How to Vet Your Ag Lender

When evaluating potential agricultural lenders, it's essential to thoroughly vet them to ensure they can meet your farm's needs. Here are some key aspects to consider: 

Industry Experience and Knowledge

One of the most critical factors in selecting an agricultural lender is their experience and understanding of the agricultural industry. An ag lender with extensive industry knowledge will:

• Understand agricultural cycles and seasonality, providing financing options that align with these patterns.
• Be familiar with the specific needs and challenges of your farm type, whether you run a dairy farm, grow crops, or manage a vineyard.
• Offer valuable agricultural industry insights and advice that can help you make informed business decisions. 

Flexibility and Customization

Every farm is unique, and your financing solutions should reflect that. Look for an ag lender who is willing to:

• Tailor financing solutions to meet your farm's specific requirements.
• Offer a variety of loan types and repayment options to suit your financial situation.
• Discuss and adjust terms as needed to ensure the loan remains manageable throughout its duration.

Competitive Rates and Fees

The cost of borrowing is a crucial consideration. Finding the best interest rate and fees means you’ll not only be getting a loan that will have a positive impact on your finances, but one that you’ll be able to pay back. Ensure your ag lender offers:

• Competitive interest rates on loans to keep your financing costs low.
• Transparency in fees and charges so you know exactly what you're paying for.
• Good value for the cost of borrowing, ensuring you receive the support and services you need at a fair price.
• A key question to ask your lender is whether or not there are prepayment penalties. 

Strong Financial Stability and Reputation

Choosing an ag lender with a solid financial foundation and a positive reputation in the agricultural community is vital for long-term success. Look for:

• A proven track record of financial strength and stability, indicating the lender's ability to support you in the long term.
• Positive testimonials and references from other farm owners who have successfully worked with the lender.
• A good reputation within the agricultural community, which can be a reliable indicator of the lender's reliability and trustworthiness. 

Responsive Customer Service

Good customer service can make a significant difference in your lending experience and help resolve any problems you might encounter. Ensure your ag lender provides:

• Easy access and responsiveness to inquiries, ensuring you get the answers you need promptly.
• A dedicated point of contact for your account, so you always know who to turn to for assistance.
• Prompt turnaround times for loan applications and decisions, helping you secure funding when you need it most.

Additional Resources and Support

Beyond financial support, a great ag lender offers additional resources that can help you manage your farm more effectively. These may include:

• Educational resources and workshops on farm financial management, helping you improve your business knowledge.
• Referrals to other agricultural professionals, such as accountants and insurance agents, to provide comprehensive support.
• Assistance with government programs and grants, ensuring you take advantage of all available financial opportunities.

Long-Term Partnership Potential

Finally, consider the potential for a long-term partnership with your ag lender. A lender committed to building a long-term relationship will:

• Show a willingness to grow with your farm over time, providing support as your needs evolve. A track record of building long lasting relationships with clients is a good indication of long-term partnership potential.
• Offer opportunities for future collaboration and support, ensuring you have a reliable financial partner as your farm expands.
• Demonstrate a commitment to your success beyond just the bare minimum, helping you navigate challenges and seize opportunities.  

Choosing The Right Agricultural Lender

Choosing the right ag lender is not just about securing a loan, it's about finding a partner who will support your farm's journey. Take the time to vet potential lenders, consider their industry experience, flexibility, rates, reputation, customer service, additional resources, and long-term partnership potential.  

Have questions? Contact us today to see how we can help you. 

Reporting requirements have changed and this blog may no longer be accurate.

What is a BOI Report?

The Beneficial Ownership Information (BOI) report is a new type of report required by the U.S. federal government that discloses the owners of a business. Most businesses are required to file the BOI report with the Financial Crimes Enforcement Network (FinCEN) between January 1, 2024 and March 21, 2025. This report was created to help increase transparency of businesses and help fight illicit activity through the use of business structures. There are civil penalties if the BOI report is filed late and criminal penalties for willfully failing to file. BOI reports must be updated within 30 days if there are any changes, and businesses will be required to file an updated BOI if any information changes such as address, or the addition or reduction of owners. Read below to learn more about this report.*

*While our Business Services team can provide some guidance on this matter, specific questions on beneficial ownership and your potential requirement to file the BOI report should be referred to your legal counsel as our team does not file beneficial ownership information on a customer’s behalf with the Financial Crimes Enforcement Network.   
 

Do I need to file a BOI report for my business? 

The general rule is, if you filed documents with the secretary of state — or any similar office under the law of a state or Indian tribe — when establishing your business, you may need to file the BOI report.  There are a limited number of entities exempt from filing. Here are some examples where you may not need to file a report: 
 

• Sole proprietors doing business under their own name (no corporation or LLC)
• General partnerships (no filing done with secretary of state)
• Larger businesses and non-profit organizations*
• Highly regulated industries
  • Examples include: publicly traded businesses, governmental authorities created by federal, state, or tribal governments, banks and credit unions, money transmitters, securities brokers and dealers, investment companies and advisors, venture capital fund advisers, insurance companies or producers, commodities brokers and dealers, public accounting firms, public utility companies, pooled investment vehicles, and inactive businesses

*For large businesses, you must meet all of the following criteria: over $5 million in gross revenue reported on the previous year's tax return and without any foreign-source revenue, business employs over 20 full-time employees in the United States, and have a physical office location in the United States. For non-profit organizations, you must meet one or more of the following criteria: an organization that received IRS approval for tax-exempt status under Internal Revenue Code section 501(c), a political organization that is tax-exempt under section 527(a), or an organization that is a trust under section 4947(a). 
 

Who needs to be included on my BOI report?

See the table below for a timeline on filing your initial report and an updated report if changes are to occur. 

Who needs to be included on my BOI report?

On the BOI report, you must identify the company’s beneficial owners. A beneficial owner is any individual who, directly or indirectly, exercises substantial control over the reporting company or owns/controls at least 25% of the ownership interests of the reporting company. The following information on each company and each beneficial owner must be included: 

What if I fail to file my BOI report on time?

Failing to file the required information through FinCEN by your required deadline could have significant consequences. Willfully failing to file or providing fraudulent information may result in a daily fine of up to $591, imprisonment for up to two years, or a fine of up to $10,000.
 

How do I prepare now for BOI filing?

While Farm Credit’s Business Services team can provide some guidance on this matter, specific questions on beneficial ownership and your potential requirement to file the BOI report should be referred to your legal counsel as our team cannot file beneficial ownership information on a customer’s behalf with FinCEN.  

Here are some recommended “to-do’s” in preparation for filing: 
 

• Review your list of business owners and key employees.
• Collect the Beneficial Owner personal information and make sure is up to date.
• Review your by-laws or operating agreements. You may need to add language that requires company’s beneficial owners to provide the business with required information.
  Consult with your attorney for additional support in your by-laws and filing requirements.
• Do your research at Beneficial Ownership Information Reporting | FinCEN.gov
• A reporting company can file online through the FinCEN BOI website at BOI E-FILING (fincen.gov)

If you have questions or need guidance on filing, a member of our Business Services team may be able to help. With increasing complexities in accounting, a member of our team may be the solution to your accounting needs. Visit our Business Services page to learn more or contact us today at 888.339.3334! 
 

When we talk about social security benefits, the subject is often met with a lot of negative thoughts.  Generally, most people don’t look it as much of a benefit for retirement and many don’t believe it will even be there when they reach retirement age. 

The truth is, we have been talking about making changes to the social security system for decades, but no major changes have happened yet.  If and when our security system is overhauled, it will have to be done gradually, with older taxpayers grandfathered into the system.

While it is true that we cannot count on social security to cover our living expenses in retirement, for most of us it still will provide the basis for our income in our senior years.  Here are a few things we should keep in mind as we plan and build for our retirement years.

How do you qualify for social security?

To qualify for social security, an individual needs 40 credits of earnings.  A person’s benefit is determined by their top 35 earning years adjusted for inflation.  In 2022, an individual needed to earn $1,510 to receive one credit with a maximum of four per year. In other words, to qualify, a person needs 10 years of work. 

It’s important to note that special rules apply to self-employed farmers.  If a farmer does not earn enough for the year to receive his four credits, the farmer can take the optional social security method, pay the resulting self-employment tax, and get credits for that year.  This step is very important for farmers to make sure they get their 10 years of earnings in.  When we are young, we don’t really think about our mortality and our retirement years.  However, social security benefits are there in case one becomes disabled or, in case of death, would provide survivor benefits for our children.  This makes it essential we build that history as soon as possible.

What is full retirement age?

Full retirement age for those born in 1960 or later is 67.  For those born between 1943-1960, the age gradually increases from 65 to 67.

How does early retirement effect social security benefits?

A person can start receiving retirement at age 62, but there will be a decrease in monthly benefits until they reach full retirement age.  The monthly benefit you start with will be your monthly benefit forever, only changing with increases for inflation.  For the person taking social security at age 62, the reduction is about 30% from the amount they would receive at full retirement.  Additionally, there is an annual limit on earnings until a person reaches their full retirement age.  This year (2023) 2023, the limit is $21,240.  Social security will deduct $1 for every $2 dollars earned above that amount.  Before taking social security early, these considerations need to be taken into account.

How does delaying benefits effect social security benefits?

On the other side of this, a person can always delay taking their benefits until age 70.  A person’s monthly benefit will increase about 8% a year until they reach age 70.  After age 70, this will not change, nor will delaying it raise the monthly payment.  Consequently, there is no reason to delay taking benefits after age 70.

What do these benefits mean for spouses?

A spouse receives one half of the retired workers’ benefit at full retirement age.  If an individual has both benefits from their spouse as well their own, the individual always gets their own first.  The individual may receive more if the spouse’s benefit is higher.  In the event of the death of an individual, the surviving spouse then receives the benefit that is highest.

Are social security benefits taxed?

Up to 85% of social security benefits are taxable, depending on other income.  For a taxpayer that is filing married, if their other income is over $44,000, they could pay tax on up to 85% of their social security income.

In summary, the decision of when to start receiving social security is one that should not be taken lightly. Everyone’s financial situation and life expectancy is different, so it not a one size fits all decision.  The first step is to check out your earnings and projected social security income at: ssa.gov/myaccount. This website replaces the yearly benefit letter that we all used to receive.  This will help you start the retirement process.  It is always a good idea to consult a retirement specialist or consultant to help you through this process. 

What is MARBIDCO?

The Maryland Agricultural & Resource-Based Industry Development Corporation (MARBIDCO) is a quasi-public economic development organization chartered by the State of Maryland. Their mission is to help Maryland's farm, forestry, and seafood businesses succeed through financial partnership and other services.

What MARBIDCO offers

• Loan and grant programs for farmers, watermen, and rural business owners
• Land preservation programs to assist landowners in securing and protecting rural lands
• Partnerships with commercial lenders (like Farm Credit!) to maximize rural lending opportunities
• Business resources and planning tools for rural entrepreneurs

How does Farm Credit work with MARBIDCO?

Farm Credit can lend up to 80 percent of the appraised value or the purchase price, whichever is less, which equates to a 20 percent down payment. We understand this can be a challenge, especially for those that are young, small and/or beginning farmers. For our Maryland farmers, MARBIDCO is a resource we can turn to in order to help bridge that gap.

Here are some first steps:

1. Research MARBIDCO and the programs they offer:
   • Land preservation option – Rural Land Preservation Facilitation and Next Gen Programs | MARBIDCO
   • Loan options – Agricultural & Rural-Business Industry Loan Programs | MARBIDCO
2. Reach out to Farm Credit and one of our loan officers can help facilitate a call with the MARBIDCO staff, which will include checking the farm business and/or property’s eligibility
3. Proceed to application process

Ready to apply?

1. Prepare a robust farm business plan (Not sure where to start? Click here.)
2. Apply with Farm Credit (items to include: loan application, financials and business plan)
   Loans are evaluated for:

• Repayment: Ability to pay any debts (farm and personal) with income being generated
• Liquidity: Available cash on hand to service any debt payments within the next 12 months
• Equity: Looking at your ratio of assets to debt
• Credit: Pull credit report and evaluate history. Looking for no late pays, bankruptcies, tax liens
• Collateral: Evaluating value of the property to be purchased via appraisal

3. Once approved with Farm Credit, complete the MARBIDCO application process with assistance from your Farm Credit loan officer

What’s next?

The process of applying with Farm Credit and then MARBIDCO can take up to six months to complete. Be sure to inform all parties (sellers, real estate agents, attorneys) involved from the very beginning that you plan to work with both Farm Credit and MARBIDCO, to ensure this process goes as quickly and as smoothly as possible.

How does this partnership work?

Here’s an example scenario:

You are interested in purchasing a 100 acre farm. The proposed purchase price is $1,000,000. You have strong credit and a good income history. You know from your prior conversations with Farm Credit we require a 20 percent down payment. Your loan officer recommends two potential options for you to consider with MARBIDCO assistance:

Option 1: MARBIDCO Next Gen grant

• Utilize the farmland conservation easement option purchase program to help preserve the subject property from future development; this is an easement option purchase, which will limit land usage in the future
• MARBIDCO will pay up to 51 percent of the Fair Market Value (FMV) of the land only (with a cap of $500,000)
• Those interested in applying to the Next Gen program are requested to make contact with the county farmland preservation program office to determine eligibility of the property. (Not sure who to ask? Your loan officer can help you contact your local office.)
• Closing Transaction Fee: $2,500 (Next Gen only)

                       $1,000,000         (purchase price)

                       -$200,000            (MARBIDCO Next Gen grant)

                       $800,000             (Farm Credit loan amount)

Option 2: MARBIDCO Maryland Resource-Based Industry Financing Fund (MRBIFF)

• Can lend between 20-40 percent of financing needed, but MARBIDCO’s financing must be no greater than Farm Credit’s loan amount
• Current MARBIDCO interest rate*: 3.75% for first three years, 4.50% for the next three, and 5.75% for remaining life of loan
• Will typically have a balloon at ten years and require you refinance remaining balance
• Loan Origination: 1% of MARBIDCO loan amount (MRBIFF only)

                       $1,000,000 (purchase price)

                       -$350,000   (MARBIDCO loan amount)

                       -$50,000     (your cash down payment)

                       $600,000    (Farm Credit loan amount)

Are you searching for beginning farmer resources? Check out our beginning farmer page or our agriculture loans page. If you need help understanding how MARBIDCO and Farm Credit can work together to maximize your options, give us a call at 888.339.3334. We're here to help!

*As of January 31, 2023.

Not everyone enjoys doing taxes, but they are an annual requirement for most of us. If you are a farmer or small business owner, tax time can be especially challenging!

Have you been maximizing your tax deductions? Are there items that are falling through the tax cracks? As a farm tax accountant, I highly encourage you to look at these common items that you may need to analyze every year.

Take control over your tax plan

Annual tax planning is a proactive way to minimize tax liabilities and ensure all available allowances, deductions, exclusions, and exemptions are working together in the most tax-efficient way. This can reduce your total income tax paid each year. We’ve seen increased commodity prices and unexpected twists and turns in the industry this year. Items like equipment trades, timber sales, and even a large business loss can affect your bottom line and tax return this year, but may also prevent an unexpected tax bill in future years.

Decrease taxable income

Common expenditures to reduce taxable income include:

• Prepaying inputs and other allowed items, capital expenditures, and retirement contributions. Depending on your entity structure, retirement plan contributions can be significant, especially for self-employed individuals via a Simplified Employee Pension (SEP) or other qualified plan. Having a diversification of retirement assets outside of farming is a good thing!
• Healthcare deductions: create an employee benefits deduction to allow for business deduction of these expenses. A common way that farmers do this is farm income averaging. This is a way to average all or some of your farm income using rates from the three prior years.

Increase taxable income 

If a farm loss is inevitable, common ways to increase income include:

• IRA distributions
• IRA to ROTH IRA conversions. In the pathway of an IRA to ROTH IRA conversion, this can generate taxable income on the tax return, but the earnings are tax free. If you have a farm loss, this income that is generated by the conversion and no income taxes would be owed on the money rolled into an IRA.
• Selling of non-farm capital assets
• Are your repair bills high this year? You can make an election to capitalize repairs rather than expensing them. This can be adjusted on an annual basis.

Before tax planning, review the following items:

1. Update your balance sheet and profit/loss statement.
   Having your records up-to-date is important because the balance sheet gives a financial snapshot of your business at that time. Comparing your profit and loss year-end statement aids you in measuring your business’ success. This means you have to dig deep into reconciling your bank accounts and cleaning up the check register. If you aren’t sure where to start with these items, contact us – we have a few templates for you to use!
2. Review your budget and examine your cash reserves.
   This process is important to know how much cash you'll have available between now and yearend. Did you purchase or plan to purchase any fertilizer, feed, chemicals, etc. that are considered a prepay? These were purchased at a discount, but are usually stored and used in the next coming year. It's important to identify the prepaid expenses to possibly move these items to the balance sheet. These prepays can increase your expenses, but may take your profit into a loss. A rule of thumb is to use 50 or 100 percent of the prepays andmove those into the next year.
3. Do you have dead assets? Be sure to review your depreciation schedule for all of your current livestock buildings, machinery, and equipment. Clearing out old items that are no longer on the farm is important to update on the depreciation schedule.

Last, but not least, start tabulating your amounts for 1099 filings and wrapping up your fourth quarter payroll filings. Soon, it will be time to file 1099s and distribute your employee’s W2s. This year’s tax deadline for entity filers is March 15, 2023 and individual filers is April 15, 2023.

Keep these items on your to-do list for tax preparation to save some money or spark your interest to get last year’s tax filing amended and save you tax dollars. Call your tax accountant and business financial team to schedule an appointment for more guidance and to discuss these options. 

Financing equipment is a great tool to keep working capital in your hands. Loans and leases are both viable options, but what is the difference between the two, and which will work best for your operation?

Most people are familiar with a loan, but leasing is another way for customers to obtain the equipment they need to get back in the field. A lease is an agreement between the equipment owner (lessor) and a customer (lessee) to pay for the use of the equipment in the form of rental payments for a specific amount of time with an option to return or purchase the equipment at the end. At the end of the lease term, you then have the option to purchase the equipment you have been using.

An important term to understand when it comes to leasing is residual value, which is the value of the equipment at the end of the lease (and the stated purchase price that the lessee would pay should they choose to purchase the piece at the end of the lease). The residual value helps determine what payments will be. A higher residual means lower lease payments.

Let’s look a little closer at the differences between loans and leases, then look at an example.

Let’s walk through an example:

A customer is looking to acquire a $100,000 tractor. He’d like to work with Farm Credit for a loan or lease and is comparing the two options.

In this case for leasing, the lessor or owner of the equipment would be Farm Credit. The lessee is the customer. The residual value of the tractor after 60 months of use is 51% ($51,000), which was determined by several factors including how many hours of use, term length, and what the customer wants to do at the end of the lease (walk away, renew the lease, or purchase the tractor). In this case, the customer planned to renew the lease or purchase the piece, and that new contract would work off the $51,000.

It is important to note that when leasing a piece of equipment, the customer is also responsible for all insurance, maintenance, taxes (if applicable), and all other costs of ownership (example: fuel).

Most customers are comfortable with a loan, but less familiar with leasing. Why would someone lease?

• Leases offer 100% financing, with no down payment required. However, the first payment is required at signing.
• Leasing can save money. Your payments accrue on a smaller balance, with the residual acting like a balloon payment at the end, rather than the full cost of the equipment. Talk to your lender for more specifics on this.
• Leasing helps preserve working capital for other purposes, as you are only paying for the portion used, rather than the full value of the piece.
• Cash flow can be improved since the flexibility of leasing allows for the payment schedule to be extremely customized.  
• When leasing, equipment can be replaced faster to keep up with current technology, ease the difficulties of equipment obsolescence, and ensure access to reliable, low maintenance equipment with the newest options at all times.  
• There is less ownership risk - the lessor bears the risk on the residual value (ex: equipment values are extremely high now, and if they fall, that is the lessor’s problem, not the customer’s).
• Leasing is a great tax management strategy. Payments can be deducted as operating expenses to lower taxes. Larger deductions over a shorter period accelerate the write-off.
• Leasing is also predictable expensing, rather than “one and done” with bonus depreciation and Section 179.
• Leasing is a great estate planning tool. Leased equipment is easily transitioned to the next generation at the end of the lease term.

Always consult with your CPA or tax professional to make sure you are choosing the best financing option for you and your business.

It is no secret that the current market for equipment is unlike it’s ever been before. Availability is still an issue, although better than this time last year. Prices have certainly increased, and there are a number of other reasons customers site for caution with their equipment acquisitions. Let’s assume that most pieces are 20% more than they were two years ago. On a big purchase, like a forage harvester, that is extremely significant. A lease can be much more palatable, especially with high residual, thus creating lower lease payments.

To learn more about leasing, talk to one of our ag lending experts today at 888.339.3334.

This article was written by Emily Snyder, Farm Credit EXPRESS Relationship Manager.

Evaluating your loans, rates, and use of cash reserves each year is a best business and personal finance practice. Planning is key, and these tips should aid in your decision making on current and future loans.

Everything is costing more money today, and borrowing money is no exception. Whether its mortgages, auto and equipment loans, personal loans, home equity lines of credit, or business lines of credit, payments on borrowed funds have increased significantly in the last 12 months.   

You’re probably wondering, “What is driving the increased payments?”  In early 2022, the Federal Reserve announced they were raising the key interest rate in order to fight inflation. Since then, they have raised rates by 2.25 percent, meaning for every $1,000 owed, borrowers are paying an additional $22.50.  As interest rates rise, the amount of interest due on borrowed money increases, thus resulting in a higher required payment.   

For those who have a fixed rate loan, your payments should have remained the same, because at the time the loan originated, your interest rate was locked in for a set period of time, resulting in a consistent payment over the term of the loan. An exception would be if you obtained a fixed to variable rate loan at time of origination. On these loans, after a certain period of time, the rate will become variable, meaning it is subject to change, which could affect your payment. Reach out to your lender to see when the fixed rate expires and discuss your options.  

If you have a loan with a variable interest rate, you have probably noticed a considerable increase in the required payment due because as the benchmark or index rate changes, the interest rate on the loan has also changed.  While a variable rate loan is not as enticing in a rising rate environment, there are benefits to using them:

• Short term borrowing needs where the interest rate may still be lower than if you were to obtain a fixed rate
• Situations where you will be advancing the funds over a period of time, instead of taking one lump sum at time of origination  

If you currently have a variable rate on a term loan, you may want to discuss options for fixing the rate for the remaining term with your lender. There are advantages and disadvantages to both fixed and variable rates, which is all dependent on your particular situation.  

We are often asked by customers if they should pay off their loans early with extra cash at the end of the year. For some of our crop and dairy operations, it is a good year. Yes, input costs are up, but it may be the third or fourth most profitable year for some dairy producers with probably the highest milk price we have seen in the industry. When asked about paying loans off early, the standard consulting answer is, “It depends”.

Before paying your loan off early, it’s important to consider:

• The type of loan (line of credit, equipment, or long term mortgage)
• Interest rate on the loan
• Plans you have the next few years

If you know you have plans to build something or make a major purchase in the next few years and will need to borrow, it may be better to use your cash and keep the low interest rate loan you have, especially if it is fixed rate.

If you have no major investments in the short term (3-5 years) planned, then paying off variable rate loans first isn’t a bad move.

We recommend to producers these same best practices during both good and bad times:

• Pay down lines of credit first. These are great cash reserves when you need them.
• Build liquidity and more importantly, liquid reserves. Liquid reserves outside the available line of credit are cash and/or investment accounts and prepaid expenses (normal operating items we pre-purchase to defer income taxes – this is not equipment purchases to defer taxes).
• Consider putting some funds away for retirement. This will make transitioning the business easier in the future if you have saved some for retirement.
• Purchase capital items that are needed or necessities (not wants), as long as the goals for the above three items are met.
• Reduce your debt. Putting this at the bottom of the list assumes that the business is in a good financial position and has positive cash flow prior to paying off debt first. Increasing rates may make it more important to not pay off low interest rate loans if you are planning to borrow more at higher rate (even though rates are still low compared to the 80s and 90s).

How do we decide where to put the funds? Planning! Tax, cash flow, and business planning are key to doing this well. If we have good goals with our plans, it will make deciding what to pay off, or what not pay off, easier.

If you’re ready to start the conversation for a loan or about your current farm finances, reach out to our team at 888.339.3334 or visit HorizonFC.com today.