Equipment financing sprouts options for strong potato growing market
The retail potato market remains hot, according to a recent news release from Potatoes USA,1 based on its annual sales and utilization study on potato consumption in 2021.
Retail potato sales are up, compared to three years ago, even though sales have leveled off from the “panic buying” of frozen potato products experienced during the height of the pandemic. U.S. potato exports also increased by 4%, according to the study, which noted nearly a 9% increase in fresh potato exports and a 10% increase in potato chips.
This study underscores agriculture’s contribution to the economy, including the need for investments in the equipment and technology required for grower operations. Fortunately, there are a variety of equipment financing options enabling growers to upgrade machinery or take advantage of advances in technology without a large outlay of cash.
Types of financing
Some of the most frequently used equipment financing options for agriculture producers include loan financing, and capital or operating lease financing. Typically, a loan is the most popular equipment financing choice for those who can use the depreciation benefit and tax credit, if applicable. If a producer does not need the depreciation benefit or doesn’t value the depreciation, then an equipment lease might be a better value because it offers a lower rate, improves cash flow and provides other benefits.
The two most common types of equipment leases are the capital lease and the operating lease. A capital lease, also known as a finance lease, offers the widest flexibility of term length, which can help keep payments low. Capital leases also provide a variety of tax benefits, including the ability to write off depreciation and interest expense for the acquired equipment on the grower’s profit and loss statement (P&L), and often, on income taxes. Capital leases can be structured with a variety of options at the end of the lease term. This can include purchasing the equipment for $1, or for a stated purchase amount. Some capital lease structures also allow for lease renewals, usually at a predetermined price.
With an operating lease, the potato grower or processor is able to deduct the entire lease payment on its P&L. An operating lease may also provide significant cash flow benefits to the lessee because the lessor invests its own equity in the equipment or storage facility, which is known as taking a residual position. Operating leases also typically qualify as a tax lease – meaning the equipment leasing company utilizes the tax benefits associated with equipment depreciation, passing the savings on to the lessee in the form of lower monthly payments. This is especially helpful to potato growers and food processors who can’t take the depreciation themselves, often because they’ve maxed out their tax deductions or are trying to use up tax credits carried forward from prior years. At the end of an operating lease, the equipment or storage facility can be purchased, or the lease can be renewed.
Financing for storage structures
Single purpose storage financing is a unique product that offers specific advantages to a potato grower or a food processor. With this equipment finance option, agriculture producers may obtain or construct single purpose agricultural structures while avoiding the down payment, encumbrances, fees, costs and paperwork associated with a real estate mortgage. Typically, single purpose storage financing agreements are structured to ensure the agriculture producer absolute ownership at or near the end of the lease term.
Anyone who is planning to build a storage facility or make improvements to a facility may want to consider single purpose storage financing.
Other financing considerations
Conserving cash and credit lines are two of the most important reasons agriculture producers finance equipment. Here are several others:
- Up to 100% financing: All project costs can be bundled into one plan, including sales tax, labor, equipment and freight.
- Reasonable amortization schedules can be matched to the agriculture producer’s budget and cash flow requirements.
- Pricing is competitive and provides the ability to lock in low rates and improve cash forecasting.
- Flexible payment options can be designed to complement seasonal cash flow requirements.
- Financing fees are typically less than traditional mortgage financing or term loans.
- Other possible savings include no appraisal, no construction monitoring and ground lease in lieu of First Deed of Trust.
Although agriculture producers are often faced with finding balance between tight budgets and making capital investments in the business, there are multiple options when it comes to equipment financing. Finding a finance provider that takes the time to understand the specific needs of the business and has a track record of success financing agriculture investments is an important part of the equation.
Potato growers and their finance providers are working to ensure individual farms and other agribusinesses can take advantage of new equipment and remain competitive, helping keep up with consumers’ love of potatoes – whether consumed at home, in restaurants, or both.