Agricultural Lending

Equipment Loans

Loans to finance machinery and equipment are considered capital debt. They should be supported and serviced from profitable operations, including any rental income derived from the equipment. These loans should be structured to ensure repayment within the useful life of the equipment. If the debt is being payed as agreed, according to a reasonable repayment program, and the source of repayment is generated through profitable operations, the debt would usually be rated “pass.”

Additional investigation is warranted when equipment loans are being paid with advances on short-term operating loans, because operations are not sufficiently profitable. A thorough analysis of repayment capacity should be conducted, and the debt should be considered for classification.

When classifying collateral-dependent equipment loans, it is important to have current, documented values for all pieces of equipment, including date and source of valuation. Independent appraisals are preferable, but values provided by management are acceptable if sufficiently documented. If the collateral values support outstanding balances, a substandard classification is normally appropriate.

If the debt is not fully protected by the value of the collateral, a loss classification should be considered for the residual balance unless the debtor has the ability to provide additional security or an alternate source of repayment.

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