Navigating Equipment Loans and Leasing Options to Optimize Your Farm’s Capital Structure
Running a farm today requires more than just good land and genetics—it requires a strong financial strategy. Equipment is one of the biggest capital outlays in agriculture. Tractors, forage harvesters, mixers, and pivots are critical to daily operations, but they also represent major investments that can strain cash flow if financed improperly.
The key is not just acquiring the equipment you need, but structuring those purchases (or leases) in a way that supports your long-term capital health. Here’s how to navigate equipment loans and leasing options to optimize your farm’s capital structure.
The Role of Capital Structure in Farming
Capital structure is the mix of debt and equity your farm uses to finance assets. A well-balanced structure provides the liquidity to cover day-to-day operations, the flexibility to adapt to market changes, and the staying power to withstand down cycles.
Poor capital planning can leave farms cash-poor and debt-heavy—especially when equipment purchases are treated as isolated transactions rather than part of a broader financing strategy.
Equipment Loans: Building Long-Term Ownership
When to Use:
Buying high-use assets with a long useful life (tractors, combines, silage trucks).
When equity in the asset will help improve your balance sheet.
If interest rates are favorable and fixed.
Advantages:
You own the equipment outright at the end of the term.
Potential tax benefits through depreciation.
Builds equity on your farm’s books.
Considerations:
Large down payments can strain working capital.
Loan terms may outlast the asset’s practical life.
Variable interest rates can add risk in a rising-rate environment.
Leasing: Preserving Cash and Flexibility
When to Use:
For equipment that rapidly depreciates or becomes outdated (technology-driven machinery, specialty tools, feed mixers).
When conserving cash flow is more important than ownership.
If you need predictable monthly expenses.
Advantages:
Lower upfront costs preserve liquidity.
Flexible terms let you upgrade more often.
Lease payments are often fully tax-deductible as operating expenses.
Considerations:
No equity build—when the lease ends, you don’t own the asset.
Over time, leasing can be more expensive than buying.
Early termination penalties may apply.
Blended Strategies: Matching Financing to Asset Life
The most effective farms match the financing tool to the asset’s expected use and value:
Loans for long-life assets: Land prep tractors, pivots, manure handling equipment.
Leases for shorter-life assets: Skid loaders, mixers, precision ag tools, or tech-driven equipment that will be outdated in a few years.
Operating lines for seasonal cash needs: Fuel, feed, and labor.
This blended approach keeps your capital structure balanced while ensuring liquidity.
Practical Steps to Decide
Run ROI Calculations – Compare cost of ownership vs. leasing over the expected use period.
Review Balance Sheet Impact – Will this loan improve or weaken your equity position?
Check Your Liquidity Ratios – Don’t sacrifice working capital for down payments.
Look Ahead 5–7 Years – Consider both technology shifts and future resale value.
Involve Your Lender & CFO – A strong financial partner can stress-test different scenarios.