What’s the Difference And Which is Best for Your Operation?

Running a successful farm or agribusiness often requires some form of financing, but not all loans are created equal. Understanding the difference between an equipment loan and an operating loan is essential to choosing the right financial tool for your operation’s needs.

Here’s a breakdown of how these two loan types work, what they’re used for, and how to decide which one is right for you and your farm.

Equipment Loans: Investing in the Long Term

An equipment loan is used to purchase durable assets that your operation will use for many years. You would take out an equipment loan for things like tractors, combines, irrigation systems, grain bins, or processing equipment. Key Features of Equipment Loans:

• Secured by the equipment itself, which serves as collateral
• Has longer repayment terms, often 3-7+ year,s depending on the asset’s useful life
• Fixed or variable interest rates
• Builds equity in your operation over time

If you’re looking to invest in equipment that will improve your operations' efficiency, expand your capabilities, or replace aging machinery, an equipment loan is typically the best option. This type of financing will allow you to spread the cost of large purchases out over time while preserving your cash flow.

Operating Loans: Fueling the Day-to-Day

An operating loan provides short-term working capital to cover seasonal or recurring expenses like seed, fertilizer, fuel, payroll, rent, or feed.

Key Features of Operating Loans:

• Short-term loan, often revolving like a line of credit
• Usually repaid within 12 months, or at the end of the production cycle
• Helps manage cash flow during periods of high expense and delayed revenue
• May or may not be secured, depending on the lender

If you need funding to get a crop in the ground, feed livestock, hire an intern, or manage the costs of running your operation before income starts rolling in, an operating loan is a practical and flexible solution.

Choosing the Right Loan for Your Operation

The main differences between these two types of loans come down to purpose and timeline. In many cases, growing operations will need both types of loans at different times of the year. The key is working with a lender who understands agriculture and can help structure your financing based on your cash flow, goals, and production cycle.

At Agri Business Finance, we specialize in helping farmers and ag producers access the right type of capital at the right time. Whether you’re investing in new equipment or simply need working capital to get your season off the ground, we’re here to help you choose the loan that fits your operation best.

Have questions about equipment or operating loans? Let’s talk! We’ll walk you through your options and help you make the best financial decisions for your business.