For many farmers and agribusinesses, securing a loan is a necessary part of managing a successful agricultural operation. Whether you’re looking to purchase farmland, upgrade machinery or build new infrastructure, financing can provide the resources to make it possible. However, a crucial decision lies in the length of your loan term. The choice between a 10, 20 or even 30-year loan can have significant financial implications on interest costs, monthly payments and overall financial flexibility.
Understanding the pros and cons of different loan terms helps you make informed decisions that align with your farm’s unique needs. Factors like interest rates, cash flow management and the life expectancy of your equipment can better position your business for long-term success.
Interest rates and loan terms: the basics
Loan terms and interest rates are closely linked. In general, shorter loan terms (such as 10 years) come with lower interest rates, while longer terms (like 20 or 30 years) have higher rates. Here’s why: when lenders offer loans with shorter terms, they’re taking on less risk, since the loan is expected to be paid off faster. As a result, they’re able to charge lower interest rates.
A shorter loan term may seem like an attractive option because of these lower rates. However, it’s essential to consider the trade-off. With a 10-year loan, your monthly payments will be significantly higher than with a 20 or 30-year loan, which can affect your cash flow and make it more challenging to manage expenses during lean months.
Comparing 10-year, 20-year and 30-year loan terms
Each loan term option comes with its own set of advantages and disadvantages. Here’s a closer look at what each term might mean for you:
10-year loan
- Pros: Lower interest rates and less interest paid over the life of the loan. The shorter term also means you’ll be debt-free sooner, freeing up capital for other investments.
- Cons: Higher monthly payments, which may put a strain on your cash flow, especially in years with lower yields or higher operational costs.
20-year loan
- Pros: A middle ground that balances manageable monthly payments with a relatively lower interest rate. This option can be a good compromise between saving on interest and maintaining cash flow.
- Cons: You’ll pay more in interest over the life of the loan than with a 10-year option, and you’ll remain in debt for twice as long.
30-year loan
- Pros: The lowest monthly payments, offering maximum flexibility with cash flow. This can help you manage other costs and save for unexpected expenses or future investments.
- Cons: Higher interest rates and more interest paid over the entire loan term. Additionally, with such a long-term loan, you’ll carry debt for a significant portion of your farming career, which may limit your future financial options.
Balancing cash flow and investment opportunities
Farms and agribusinesses often face a mix of predictable and unpredictable expenses. From seed purchases and equipment repairs to unforeseen challenges like extreme weather, maintaining a steady cash flow is vital. Opting for a longer loan term (20 or 30 years) can help ease monthly payments, allowing you to allocate funds for day-to-day operations and emergency expenses.
However, if you’re in a stable financial position and have a steady income, a shorter loan term could be beneficial in the long run. Lower interest rates and quicker loan payoff mean that over time, you’ll have more flexibility to invest in new opportunities, such as land acquisition, diversification or technology upgrades.
Consider the life expectancy of equipment and assets
A critical aspect of loan planning is matching the loan term to the lifespan of the assets being financed. Farm equipment, for example, generally has a shorter lifespan than land. Most tractors, combines and other machinery have an expected life of around 10-15 years, depending on usage and maintenance.
Why is this important? If you take out a 20- or 30-year loan to finance equipment that only lasts 10 years, you could still be making payments on machinery that’s no longer operational or even depreciating in value. This scenario could leave you with outdated equipment and create a financial burden if you need to take out another loan for new equipment. In contrast, farmland and buildings can justify longer loan terms, as these assets retain value over time and are often usable for decades.
Planning for the future: flexibility vs. financial responsibility
Choosing the right loan length requires a balance between flexibility and financial responsibility. A 10-year loan may lead to quicker equity buildup, but a 30-year loan provides more breathing room for unexpected expenses or investments in your farm’s future. Here are some tips for deciding what’s best for your farm:
- Assess your current cash flow: Do you have sufficient income to cover a higher monthly payment? If not, a longer loan term may be a safer choice.
- Evaluate your business goals: Are you looking to grow your farm or make substantial investments in the next few years? A longer loan term could provide the financial room you need to do so without overextending yourself.
- Consider interest rate trends: Speak with a financial advisor or loan officer about current and projected interest rates. Sometimes, market conditions can make a shorter or longer loan term more favorable.
- Think about asset lifespan: Match your loan terms to the useful life of the asset you’re purchasing. Shorter loans are ideal for assets like machinery, while longer terms are more suitable for land and infrastructure investments.
- Work with a trusted lender: A lender who understands the agricultural industry, like GreenStone, can help tailor a loan to your unique circumstances and guide you through your options.
The right partnership
At GreenStone, we understand that every farm is different. We know the challenges and opportunities that come with running a farm or agribusiness, and we’re here to help you find a financing solution that aligns with your goals. Whether you’re considering a 10-year, 20-year or 30-year loan, our financial service officers can provide personalized guidance to help you make the best decision for your farm’s future.
Choosing the right loan length is about more than just monthly payments—it’s about planning for your business's long-term health and growth. By considering factors like interest rates, asset lifespan and cash flow needs, you can set your farm up for success for years to come.
This blog was originally published in Michigan Farm News.
