You’ve probably heard the phrase you need to spend money to make money. And whether you’re running a farm or any other type of business, that sentiment is largely true. However, in some cases, you need to borrow money so you can spend it.
Taking out a loan costs money, but there are ways to save. Take a look at these tips.
1. Borrow Only What You Need
When taking out a loan, it’s critical to ensure that you truly need the funds. Farmers use loans to purchase land, equipment, breeding livestock and a range of other items. Ideally, you should crunch the numbers before you borrow anything.
In particular, you want to assess the potential return on investment. How much are you likely to earn if you make that investment? If you don’t make that investment, how will your business suffer? Consider questions like this as you decide how much to borrow.
2. Consider a Line of Credit
If you’re not sure how much you need, you may want to consider taking out a line of credit for your farm. That way, you have access to the funds if you need them, but you aren’t obligated to spend the money.
With most lines of credit, you only pay interest on the funds that you use which saves you money. However, there may be origination fees or other costs that you need to take into account.
3. Look for a USDA-Backed Loan
As a farmer, you can often get better rates if you take out a USDA loan. These loans are backed by the United States Department of Agriculture. You apply for these loans through traditional lenders, but the USDA guarantees the loan. So if you default, the USDA covers the majority of the losses.
As a result, the bank doesn’t carry as much risk, which means that you get to access lower interest rates. USDA loans can be used strictly for farming purposes, but they can also be used to buy homes in rural areas.
4. Consolidate High-Interest-Rate Loans
If you already have loans out for personal reasons or for your farm, you may want to consolidate those loans. If you roll one or several high-interest-rate loans into a loan with a lower interest rate, you can lower your monthly payments. If you opt to pay the same monthly payments, you can get out of debt a lot faster and save money over the long run.
5. Remember to Write Off the Interest
As your farm is a business, you get to deduct your expenses from your revenue on your tax return. You also get to deduct interest on business loans. This doesn’t make the loan less expensive, but it helps you to save money over the course of the loan.
For instance, if your effective tax rate is 20% and you pay $1,000 in farm loan interest over a year, you save $200 when you write off that interest.
6. Compare All the Costs of the Loan
As you compare different loans, make sure that you take all the costs into account. Don’t just compare the interest rates, for example. You should also take into account how various fees (origination fees, early repayment fees, late fees, etc.) affect the overall cost of the loan.
7. Choose a Lender With Your Best Interests in Mind
Finally, make sure that you choose a lender who has your best interests at heart. At Financial Consulting, Inc, we always try to get out clients the best rates, but beyond that, we ensure that you have the terms and the type of financing you need. To learn more, give us a call today.