Financing a tractor—or any other equipment you need—is a critical step in getting a farm up and running. If you have good credit, financing options can be plentiful, with low-interest options that offer long-term financing. Tractor financing for bad credit, on the other hand, can be more difficult.
For those with poor borrowing histories, the road to securing that tractor is a little bumpy. In this blog post, we’ll take a look at the options available for tractor financing for bad credit and where farmers, ranchers, and other small business owners in need of heavy farm machinery can turn to get the assistance they need.
Is My Credit Score Bad?
Lots of people know that your credit can make or break a lot of significant purchase opportunities; credit scores are determined by a group of factors that, overall, evaluate two critical aspects of your financial health:
- Your history with managing debt.
- Your ability to repay the debt in full by the due date.
Here are the factors that determine your score and their impact:
Payment History (35%)
Your record of paying back the money you owe on things like utilities, credit cards, and installment loans like a car note or mortgage.
This activity has the most considerable impact on your credit evaluation because creditors need to understand if you are trustworthy enough to stick to the terms of the loan agreement. This is why we always remind you to pay your bills on time!
Credit Utilization Rate (30%)
This is the percentage of your available credit you are using at any given time. For example, if you have a $300 balance on a credit card with a $1,000 limit, your credit utilization ratio is 30%, which is the ideal ceiling for any utilization rate.
Credit History/Age (15%)
Having a relatively long history of credit accounts will provide great information to creditors about your relationship with your debt over time. And yes, this is another reason to pay your bills on time.
New Credit (10%)
Opening multiple credit cards or other lines of credit over a short period can read as financial trouble to many creditors. If you don’t need to open a new credit line while you look for tractor financing, don’t. Remember, new lines of credit are also new bills that will somehow have to be paid.
Credit Mix (10%)
Having multiple lines of credit in good standing (like credit cards and a mortgage, for example) will show creditors how you handle different types of debt.
Credit bureaus are companies that evaluate this information and then determine a credit score. The major credit bureaus operating today are TransUnion, Equifax, and Experian. They each report credit scores that range from 300-850:
- 300–499 Very Poor/Bad
- 500–600 Poor/Bad
- 601–660 Fair
- 661–780 Good
- 781–850 Excellent
As you can see from the breakdown above, any number below 600 is a poor credit score. Around 20% of Americans live with bad credit, which means that many people can find themselves searching for good loans that aren’t affected by the financial missteps of the past.
If you have bad credit and need a loan, tractor financing with a low interest rate and a manageable installment plan could be complex but not impossible.
Farm Equipment Loan
Farms across the country are responsible for keeping agricultural production safe, consistent, and strong. To do that, farmers must be able to access the latest advances in farm technology. There are many financial resources that farmers rely on to modernize their work, and among them are farm equipment loans.
Farm equipment loans provide critical financing to farmers to buy equipment. These are typically short-term installment loans that can last up to seven years. You pay for them through a monthly or weekly installment plan.
“The majority of producers will leverage some financing for purchasing farm equipment either [utilizing] installment loans or leases,” said Ryan Steenblock, director of marketing for the U.S. and Canada at John Deere Financial. “A major benefit is the ability to preserve cash flow. You don’t have to invest all the capital upfront.”
Farm Equipment Loan Options
Since farm equipment loans are secured loans that are backed by the equipment itself, borrowers typically have two options:
Financing: With the financing option, the equipment belongs to the borrower at the end of the loan term (if you pay off the loan, of course). Financing also makes it possible for you to apply any applicable tax credits to your business’s taxes.
And since the borrower essentially “owns” the equipment under the terms of the lease, they can also build equity, which can positively impact your credit score.
Leasing: In a lease, the borrower will give the equipment back at the end of the loan. They can also opt to make a balloon payment to cover any difference in the value of the equipment and the loan amount.
Leases are ideal if you only need the equipment for a short time. Additionally, leases allow the farmer to get rid of old equipment and lease new equipment to optimize their production.
When choosing between leasing and financing something like a tractor, the timeline of approval and funding can be very important. This is especially true if you need to replace a tractor quickly to help with critical farm work.
“Most farm equipment lenders can loan up to a quarter-million dollars the same day as you apply,” said Kevan Wilkinson, a digital content manager at Balboa Capital. “Banks require collateral, and in most cases, they also require a lot of financial paperwork dating back two or three years, and a higher credit score.”
These options are great for people who have good credit. But if your credit score is low and you need a tractor or other large farm equipment, what options are available to you?
USDA Farm Loan
For a person with bad credit, the options for a traditional loan for tractor financing can be limited. However, you may want to consider a farm loan from the United States Department of Agriculture (USDA).
The financing options from the USDA are akin to those found at the Small Business Administration; they exist to provide alternative financing options for people who have attempted to find financing but can’t get approved for a line of credit anywhere else. Through the USDA, the federal government guarantees these farm loans.
USDA farm loans are designed and distributed to farmers and ranchers to help everything from getting their farm started to expand its operations. The types of loans available are:
Farm ownership loans are used to purchase a farm or expand one with additional land purchases or the acquisition of another farm.
Microloans are available for new farmers who need an infusion of cash to get their business started. Typically these loans are disbursed in amounts of $50,000 or less.
Emergency loans can help farmers and ranchers recover from unforeseen circumstances that have severely affected or halted farm production, like global pandemics and natural disasters.
Operational Loans are for seed, livestock, and farm equipment. Operational loans also cover living expenses and other costs associated with starting a farming operation. This would be the loan structure that would be ideal for tractor financing.
Captive Lenders are finance companies owned by parent companies selling the products that are being financed.
In farming, a perfect example of a captive lender is Deere Financial, owned by the tractor manufacturing giant John Deere. Captive lending agreements can be significant for borrowers, as they can take a lot of the work of shopping for both a tractor and financing option.
Additionally, captive lenders can offer lower rates than a bank; since they can back the loan with the equipment, the risk is somewhat lower. However, as with any low-interest loan option, payment history and overall worthiness will come into play.
There are indeed options available with captive lenders for people who don’t have the best credit, so tractor buyers should shop around and inquire at several retailers about the lending options available with their financing partners.
In Summary: Good Credit Will Help
Bad credit can follow us around for a long time, even as we work to make it better by changing spending habits and making better financial decisions.
Although it can make the road difficult, it’s essential not to let the reality of a bad score affect the big dreams that you may have for your future—mainly if those dreams help people get connected with high-quality farm products.
Tractor financing for bad credit holders is something that can be made possible with a little hard work and a lot of research into what’s best for your farming operation and its budget.
Also, know that any agreement for equipment finance that you’re able to secure will be an opportunity to turn your bad credit score into a good credit score and allow you to invest more into your business.