Here’s a question I get constantly: “Should I include equipment in my farm mortgage or finance it separately?”
The answer affects how you structure your farm financing, how much you pay in interest, and how flexible you are as your equipment needs change.
Let me break down equipment financing versus farm mortgages and help you figure out the right approach for your situation.
Understanding the Difference
Farm mortgages are secured by real property: land and buildings. They typically have longer amortizations (20-25 years), lower interest rates, and are intended for assets that hold value for decades.
Equipment financing is secured by the equipment itself. Shorter terms (3-10 years typically), slightly higher interest rates, and designed for assets that depreciate and need replacement more frequently.
These aren’t just different products. They’re designed for fundamentally different purposes.
Why Equipment Shouldn’t Usually Go on 25-Year Mortgages
Here’s a common mistake: financing a tractor or combine on a 25-year mortgage alongside your land purchase.
Think about it. That tractor will likely be traded or replaced in 7-10 years. But you’ll still be paying for it for another 15-18 years after it’s gone.
This creates a situation where you’re paying for equipment you no longer own while also financing new equipment. Your debt compounds on itself.
Equipment should generally be financed over periods matching its useful economic life, which is usually much shorter than 25 years.
When to Include Equipment in Your Farm Mortgage
There are exceptions where including equipment in your farm mortgage makes sense.
When you’re buying a complete operating farm with land, buildings, and equipment as a package, sometimes it’s simpler to finance everything together initially, then refinance equipment separately later.
When equipment is attached to buildings (like barn equipment, grain dryers, or other fixed installations), it might make sense to include it with the real property mortgage.
When you’re doing a major farm succession or restructuring and simplicity matters more than optimal financing structure, consolidating everything can work.
But even in these cases, consider whether separate equipment financing might be better long-term.
Equipment Loan Terms and Structures
Equipment loans typically come in a few forms.
Conventional equipment loans work like small mortgages. You borrow a lump sum, buy equipment, and make regular payments over 3-10 years depending on the equipment type and value.
Leases (capital leases or operating leases) let you use equipment without owning it, making regular payments. At lease end, you might buy the equipment, return it, or lease new equipment.
Dealer financing is often available when buying from equipment dealers. Sometimes they offer promotional rates, sometimes their rates are higher than banks.
Each structure has advantages depending on your situation.
Interest Rate Comparisons
How do equipment financing rates compare to mortgage rates?
Equipment loans typically run 0.5% to 2% higher than real estate mortgage rates.
If farm mortgages are at 5-6%, equipment financing might be 6-8%.
Why higher? The collateral depreciates, it can be moved or damaged, and the term is shorter. All of this makes it slightly higher risk for lenders.
But it’s still much better than credit cards or unsecured loans.
Matching Financing to Equipment Life
This is key: match your financing term to the equipment’s expected useful life in your operation.
Short-lived equipment (computers, small tools, equipment you’ll trade frequently): 3-5 year financing.
Medium-lived equipment (tractors, trucks, hay equipment): 5-7 year financing.
Long-lived equipment (combines, large tractors you’ll keep longer): 7-10 year financing.
By the time you’ve paid off the equipment, you’re ready to trade it and start fresh with new equipment financing.
The Depreciation Consideration
Equipment depreciates. This affects both taxes and financing strategy.
For taxes, you depreciate equipment over its class life. Your accountant handles this, but it affects your annual tax deductions.
For financing, rapid depreciation early in equipment life means you can be “upside down” (owing more than it’s worth) in early years if you finance 100%.
Larger down payments on equipment reduce this risk. If you put 20-30% down, your loan balance stays closer to equipment value as it depreciates.
Down Payment Expectations
Equipment financing typically requires 10-30% down depending on equipment type and lender.
New equipment from major manufacturers (John Deere, Case IH, New Holland, etc.) often qualifies for 10-20% down.
Used equipment or smaller brands might require 25-30% down.
This is separate from your farm mortgage down payment. You need equity for both.
The Trade-In Factor
Many farmers trade equipment rather than running it until it dies.
If you trade equipment every 5-7 years, you want your financing structured to support that.
Ideal scenario: when you’re ready to trade, the equipment is paid off or nearly paid off, so your trade-in value becomes the down payment on new equipment.
If you still owe more than trade-in value, you need to bring cash to the deal or roll negative equity into new financing (not ideal).
Dealer Financing Promotions
Equipment dealers often run financing promotions: 0% for 24 months, 2.9% for 60 months, etc.
These can be excellent deals if you qualify. But read the fine print.
Sometimes promotional rates require larger down payments. Sometimes they’re only on specific models. Sometimes the “zero percent” comes with inflated purchase prices.
Compare the total deal (price plus financing) to buying with your own bank financing. Sometimes dealer financing wins, sometimes independent financing is better.
Leasing vs Buying
Equipment leasing has advantages and disadvantages.
Advantages of leasing: Lower or no down payment. Regular equipment updates. Potential tax benefits depending on lease structure. Off-balance-sheet financing in some cases.
Disadvantages of leasing: You don’t build equity. You’re committed to payments for the lease term. End-of-lease decisions can be complicated.
Leasing works well for farmers who want to regularly update equipment and don’t want to deal with trade-ins and resale.
Buying works better if you prefer to own equipment outright and keep it longer term.
FCC Equipment Financing
Farm Credit Canada offers equipment financing alongside their mortgages.
Their equipment lending is competitive, they understand agriculture deeply, and having your mortgage and equipment financing with the same lender simplifies your banking relationships.
FCC understands that farmers trade equipment regularly and structure financing appropriately.
Bank vs Dealer vs Manufacturer Financing
You have options for equipment financing sources.
Banks (and credit unions) provide equipment loans. Rates are competitive, terms are standard, and they’re typically secured by the equipment.
Equipment dealers can arrange financing, often through captive finance arms of manufacturers. Convenience is high, but compare rates carefully.
Manufacturer financing (John Deere Financial, CNH Industrial Capital, etc.) specializes in their brands. They understand equipment values well and sometimes offer promotional rates.
Get quotes from multiple sources. Competition is good for you.
Security and Documentation
Equipment financing requires documentation:
Serial numbers and descriptions of equipment. Purchase agreements or invoices. Sometimes equipment appraisals for used equipment.
Lenders file security interests against the equipment. This is typically done through the Personal Property Security Registry in your province.
The paperwork is simpler than farm mortgages, but there’s still documentation involved.
Used Equipment Financing
Used equipment is often financed differently than new equipment.
Lenders might require larger down payments (25-30%). Terms might be shorter. Rates might be slightly higher.
Why? Used equipment has more uncertainty about condition, remaining life, and resale value.
Private sale used equipment (buying from another farmer) can be hardest to finance. Dealer-certified used equipment is easier.
The Total Debt Load Question
When you’re carrying both a farm mortgage and equipment debt, your total debt load needs to be manageable.
Lenders look at total debt service coverage. Your farm income needs to service your mortgage, your equipment loans, and your operating line.
If equipment debt pushes your total debt load too high, you might need to reduce equipment financing, buy less expensive equipment, or wait until your financial position improves.
The Rolling Equipment Debt Strategy
Some farmers maintain continuous equipment debt, trading up every few years with ongoing financing.
This can work if it’s strategic: you’re maintaining modern, efficient equipment that supports productive operations.
It doesn’t work if you’re constantly trading equipment you can’t afford, rolling negative equity forward, and increasing debt loads.
Be honest about whether your equipment strategy is supporting your farm’s success or just feeding a desire for new machinery.
Cash Purchases vs Financing
If you have cash, should you pay cash for equipment or finance it?
Arguments for cash purchase: No interest costs. Own it outright immediately. Simplifies finances.
Arguments for financing: Preserves cash for operating capital or other investments. Interest is tax-deductible. If rates are low, your money might earn more invested elsewhere than you pay in interest.
There’s no universal right answer. It depends on your cash position, your opportunity cost of capital, and your comfort with debt.
The Emergency Equipment Situation
What if critical equipment breaks and you need replacement immediately?
If you have good banking relationships, you can often arrange emergency equipment financing quickly.
FCC and banks that know you can approve equipment loans in days to weeks.
This is another reason maintaining good lender relationships matters. When you need fast financing, established relationships help.
Seasonal Equipment Financing
Some lenders offer seasonal payment structures for equipment financing.
Maybe you make larger payments after harvest when you have cash, and minimal payments during the growing season.
This matches equipment payments to farm cash flow, similar to how operating lines work.
Ask lenders about flexible payment structures if your income is highly seasonal.
The Credit Score Factor
Your credit score affects equipment financing just like mortgage financing.
Good credit (700+) qualifies you for best rates and terms. Fair credit (650-700) still qualifies but possibly with higher rates. Poor credit (under 650) makes financing difficult.
If equipment financing is important to your operation, maintain good credit.
Equipment Financing for Beginning Farmers
Young and beginning farmers often struggle to access equipment financing because they lack credit history or down payment capital.
Some programs help:
Young farmer programs in various provinces sometimes include equipment financing support.
Farm equipment dealer programs sometimes offer first-time buyer financing.
FCC young entrepreneur loans can include equipment components.
Don’t assume you can’t get equipment financing because you’re just starting. Explore programs designed to help beginning farmers.
When to Use Operating Lines for Equipment
Short-lived equipment or small purchases might come from operating lines rather than dedicated equipment loans.
If you’re buying a $5,000 piece of equipment you’ll replace in 2-3 years, drawing on your operating line might make more sense than a formal equipment loan.
But be disciplined about paying this down. Don’t let operating lines become permanent equipment financing.
Tax Planning Around Equipment
Equipment purchases and financing have tax implications.
You can depreciate equipment over time, or you can use accelerated capital cost allowance to write off more immediately.
Financing costs (interest) are deductible as business expenses.
Talk to your accountant about timing equipment purchases and financing to optimize tax positions.
The Equipment Replacement Schedule
Good farmers maintain equipment replacement schedules.
You know roughly when major equipment will need replacement. You plan financially for these replacement cycles.
This planning lets you structure equipment financing appropriately and avoid emergency situations where you’re forced into poor financing decisions.
Working With Creek Road Financial Inc.
We help farmers structure complete financing packages including both farm mortgages and equipment financing.
We can help you determine optimal structures, access competitive equipment financing, and coordinate equipment loans with your overall farm financing.
We work with multiple equipment financing sources, so we can compare options and find best terms for your situation.
Let’s Structure Your Equipment Financing Right
If you’re buying farm equipment, let’s make sure you’re financing it appropriately.
Whether it’s a major combine purchase, upgrading tractors, or outfitting a complete operation, the financing structure matters for your long-term financial health.
Contact Creek Road Financial Inc. today. We’ll review your equipment needs, discuss financing options, and help you access appropriate equipment financing.
Because smart equipment financing preserves capital, maintains flexibility, and supports your farm’s productivity without creating unsustainable debt loads. Let’s make sure your equipment financing works as efficiently as the equipment itself.