As the economy changes producers are encouraged to keep a few things in mind
There’s more to know when considering rates and money costs in our current economic environment. Here’s some things to think about:
Debt as a Tool: Use borrowed funds for the “needs” of your business and personal lives. Debt (and the associated interest cost) can be a prudent and justifiable expense when used appropriately. However, be judicious when placing wants over needs when debt is involved.
Planning Pays Off: As you consider debt for business needs, thinking ahead can reward you. The time you take to plan and research that tractor or baler (price and finance cost) beforehand can help you make the most cost-effective decision.
Shop for Money: Just like shopping for a new truck, think about a similar approach regarding the cost of borrowing. Lenders tend to reward prudence and higher levels of creditworthiness. The internet is a great source of interest rate information and the specific conditions that apply. (see websites below)
Rate Considerations: Is the rate negotiable? Can I change my rate later without refinancing costs? Is there a prepayment penalty, and what are the particulars? How is my good credit rating helping my rate? If your spouse’s credit is better, consider them as the loan applicant.
Years ago, my wife and I borrowed from a credit union for our vehicle purchases. We utilized automated withholding and paid the vehicles off. Afterward, we continued with the withdrawals and built accounts that allowed us to purchase future vehicles with less debt.
A Term Consideration: It’s usually prudent to pay down loan principal as quickly as what’s reasonable for your circumstances. If you can, without any pre-pay costs, make sure any additional funds are applied to loan principal. Another option to consider when borrowing is to go long/pay short. If allowable, this option provides for taking out as long a loan term as possible with the intention to pay it off earlier than scheduled.
This takes discipline. However, it gives you comfortable payment options when times are tight and earlier payoff options when possible.
Benefits of Debt: If the item being financed is tax deductible, you’re ahead of the game. Is it depreciable? Check with your accountant or CPA – you may be surprised at what’s allowable for a business-related debt. Will this purchase enhance efficiency or save time for your operation?
Buy New or Used? Often, a new business purchase can be cost justified if the dealer can subsidize your interest rate.
Source of Money: There are many options. Some include dealer or captive financing, banks, credit unions, Farm Credit and FSA.
Trade or Sell? In this environment, selling good used vehicles or equipment can be a great option.
Are Rates Too High? If we keep things in perspective, this is still an attractive rate environment. I remember 10 percent being a natural threshold or benchmark for “high rates” for a long time. Bottom line, if it is truly a need or a replacement necessity and you can justify the cost or payment, the rate is only one factor in a solid business decision.
It’s All Relative: We’ve all become accustomed to interest rates being considered “low.” Home mortgage rates below 3.00 percent have closed in recent times. We’ll need to become comfortable and more knowledgeable in this increasing rate environment. Lately, the inflation rate on virtually all goods and many services is a more significant concern than the cost of money. Keep in mind that our providers and sellers are also dealing with higher rates and costs.
Have a great rest of 2022, and remember, we’re all in this together.
Ken W. Knies is an agricultural and rural consultant, and owner of Ag Strategies, LLC. He may be reached at (479) 426-9518.