Money vs.Machine

Compact tractors are spring machines. New Holland blues and John Deere greens always attract a variety of landscapers, farmers and big property owners to sales floors this time of year, looking for a small tractor to spearhead property work. These rural utility machines come in all shapes, sizes and brands and feature a wealth of technologies and attachments, with price tags blowing in the wind from $10,000 to $35,000.

“There is a lot to consider when buying a compact tractor,” admits Stephen Barcuch, product marketing manager at Massey Ferguson. “What size do I need? What attachments do I need? What brand should I buy? And also, how do I pay for it?”

Financing is often the most affordable means to purchase a new piece of equipment. Whether buying a compact track loader for your budding landscape business or a new tractor for your palatial estate, the price of the machine can be worked out with a variety of finance programs (from credit cards to leasing). Understanding all of the available opportunities is essential to finding a machine and payment program that suits your lifestyle or business. Luckily, the majority of companies are more than willing to find a fit for most folks today.

“CNH Capital structures flexible payment schedules and terms to fit just about any cash-flow situation,” explains Joseph Delia, manager of Sales and Pricing Analytics at CNH Capital. “Financing is the traditional method for acquiring new equipment, because payments can be structured over
a specified term, so that the customer will eventually own the equipment. If owning equipment is important to a customer, and they can’t afford to buy the equipment outright, traditional financing is the best way to go.”

It’s easy to see that compact tractors are big business; it’s one of the hottest markets in the small equipment industry. The manufacturers that CE surveyed for this article estimated that sales for compact tractors in North America were in the realm of $2.5 billion in 2006 (with units sold in the area of 120,000 to 130,000). It’s an expansive market with an overabundance of brand players with multiple model families, which means finding your supreme machine with ideal financing will involve a little research in both tractor options and ways to pay for them. Pick the perfect machine, bundle in a few attachments, work out a fitting finance program and start off the springtide with the right machine for all seasons.

Jump in the Tractor Pool

The brain trust of The American Society of Agricultural Engineers (ASAE) defines compact tractors as small agricultural tractors equipped with a 540-rpm PTO (or power take off system) and a three-point hitch designed for Category 1 implements. Compact tractors generally have a mass less than 4,000 lbs and use less than 40 PTO hp to run their attachments.

Today, John Deere, Kubota and New Holland are the three most popular manufacturers of compact tractors — all with decades worth of compact tractor experience. Yet, there are plenty of new players primed to accommodate the growing compact tractor markets (one of small equipment’s most explosive machine categories). Case IH, Cub Cadet, KIOTI, McCormick, AGCO, Massey Ferguson, Farm Pro and Mahindra are all bringing innovative alternatives to the small utility tractor market.

There are hundreds of model choices and unique features galore. Before you start worrying about brand, you will first need to figure out what you want this chore tractor to do. Once you zero in on your weekly applications, then you can start to determine the right size tractor and the number of attachments.

“The owner should first identify what types of applications — loader work, finish mowing, etc. — that the tractor will be tasked with. Then identify the attachments that will be needed for the work. Then they can understand the tractor requirements for the applications — such as size, horsepower and hydraulic requirements — and make the appropriate tractor match,” suggests Michael Bergstrom, Case IH marketing manager for tractors under 100-hp.

Compacts are often categorized by PTO hp (not engine horsepower), mostly falling between 40 and 20 PTO hp; tractors under 20 PTO hp are considered sub-compact and are often just lawn tractors, used mainly for cutting grass. According to manufacturers surveyed, the most popular tractor size for large property owners and landscapers are between 25 to 30 PTO horsepower (which is about a $15,000 to $20,000 tractor).

Compacts are almost always sold with a loader on the front (typically in a package deal), with the availability of running multiple implements off the rear PTO system, a mid-mount PTO system (mostly for finish mowing) or the tractor’s front hydraulics. The compact tractor’s rear- or mid-PTO system works by taking the engine horsepower and transferring it through a driveline to a series of gears in the transmission housing. This drives a PTO shaft that can be attached to an implement. There are three main types of PTOs on the market today:

1) Independent PTO, which allows you to engage and disengage the PTO regardless of the transmission or clutch operation. It’s the most popular and easiest to use.

2) Live Two-Stage PTO, which uses a dual stage clutch pedal, so depressing the clutch pedal completely disengages the transmission and PTO and releasing the clutch half way engages the PTO. Fully releasing the clutch pedal engages the transmission; this allows the PTO-driven implement to get up to speed before forward/reverse travel starts (so a mower starts cutting grass before moving and doesn’t leave skips).

3) Transmission Driven PTO, which uses the clutch pedal (when it’s depressed) to disengage both the PTO and the transmission. It’s the most economically priced, but not as functional friendly as the other options.

Besides the PTO power, compact tractors will often utilize a hydraulic pump to help run attachments and various functions, everything from power steering to a backhoe attachment. The capacity of the hydraulic pump is measured in gallons per minute (gpm), and
the higher the number, the better the hydraulic power output (from 7 to 17 gpm).

Once you choose the right attachment systems, you’re going to want to figure out which implements you will need — because it’s always wiser (i.e. cheaper) to buy extra attachments with your initial purchase and get a package deal.

“If a customer finances implements with the purchase of a major unit, the low rates are available for the implements as well,” says Barcuch. “The low rate programs are not available for stand-alone attachments. If a customer purchases a tractor and then later decides to add an attachment, the interest rate will be higher for the attachment.”

After you’ve outfitted your chore tractor with the right set of attachments (consider your applications and what you want to do), your next big decision will be the transmission. Transmission choices for tractors are much the same as your truck or car. There will be gear-driven or a “manual” transmission, which will be a mechanical system, and there are hydrostatic or “automatic” transmissions, which use a hydraulic system to run your tractor.

Overall, especially when it comes to novice users like large estate owners, hydrostatic transmissions are extremely popular (it only adds about $1,000 to your purchase), but gear-driven systems still have their place with certain customer segments (like old school farmers). Gear transmissions can be more efficient and economical if you know how to run them properly. In the gear transmission realm there are three distinct options:

1. Non-synchronized transmissions are the most economical and reliable choice, but also the most hassle. You must depress the clutch, stop the tractor and shift gears, which can be tedious in applications that have a lot of speed and direction changes (think loader work).

2. Partially synchronized transmissions are smoother and easier than non-synchronized. This system allows for clutching and shifting between gears without stopping the tractor. Speed and direction changes are made easier.

3. Fully synchronized transmissions are shift-on-the-go transmissions. You shift gears without depressing the clutch or stopping the tractor. Tractors typically have a combination of ranges (A, B and C) to give operators multiple choices of speeds.

Typically, for large property owners who have a little extra money to spend, hydrostatic is the transmission of choice. It’s more user friendly and has unlimited speed changes and instant direction changes. Some manufacturers will even have unique transmissions options to boot — such as Massey Ferguson’s exclusive DynaQPS transmission and John Deere’s E-Hydro system (electronically controlled hydrostatic transmission).

“Basically upgrading to a higher spec model such as a higher level of transmission or a factory cab does not add that much to your payment when using a finance term of say 60 to 72 months,” says Barcuch. “So, I would consider the extra cost spread over an extended time period before I limit myself to a basic model.”

Most compact tractors will come with a variety of extras to complete your ultimate purchase — from enclosed cabs with air conditioning to various tire options. See the sidebars on pages (23 and 24) for more details.

Institutions of Finance

While our ancient ancestors may have preferred to barter a new purchase with fine steeds and lamb skins, smart individuals and businesses today tend to raise, allocate and utilize their assets over time in a process called financing. By implying a set of techniques balancing income and expenditures, most private users and small businesses can finance a tractor to fit their workload and pocketbook.

“We try to work with the customer and condition the loan to suit his or her financial situation,” explains Barcuch. “We have a very low decline rate of less than 10 percent. If a customer does not have the best credit but can show us a small percentage down as well as an established work history, we will be very flexible.”

The manufacturers, their dealers and the company’s credit divisions are a great place to start looking. Most companies can offer low fixed rate financing with terms from 12 months up to 84 months. The most popular are typically the longer terms, which provide customers with lower affordable payments. The standard borrowing rate percentage for financing programs these days looks a lot like this: 0 percent up to 36 months; 3.99 percent for 48 months; 4.99 percent for 60 months; 5.99 percent for 72 months; and 6.99 percent for 84 months. On the other hand, lease rates start at 1.99 percent for 24 months and increase 1 percent each year up to 72 months, although leasing options will differ between private users and commercial buyers (see more about leasing on page 24).

If a customer decided to purchase a tractor and financed $17,000 over a 60-month term at 4.99 percent, he or she would end up paying $2,243 in interest.

“John Deere has three primary financing programs for compact utility tractors,” says Michelle Haas, manager of Product Development at John Deere. “First are the low rates, which tend to be the most popular and consist of low fixed rate contracts for a set period of time — example 0 percent for 36 months. The second is waivers. These are interest and payment free loans for a set period of time, such as six months — no interest and no payments — followed by a low rate. And third, there are low introductory payments, which provide customers with a low payment for a set term, typically 36 months, and then the payment will increase slightly for the remaining term.”

The down payment for the loan is determined by the credit worthiness of the customer. If the customer has good credit they may not have to put anything down or maybe one payment in advance. If purchasing a new compact tractor, it’s always good to have some equity in the unit, but at least 10 percent of the purchase price is good business.

Monthly payments will depend on the customer’s overall cash flow situation. Total payments can be tied to a basic debt-to-income ratio, similar to a home mortgage. If the additional payment does not increase the total debt-to-income ratio over 40 percent, the customer should not have any difficulty repaying the debt. All customers are different and certain people may be able to manage a higher debt-to-income ratio. If payments need to be lower, and ownership is not a critical factor, customers can always consider leasing vs. buying outright.

“Financing in general offers a variety of benefits over an outright cash purchase. But whenever anyone acquires equipment, they need to consider the overall financial impact of that purchase — such as taxes, balance sheet and cash flow — so it’s important to consult their tax or legal advisor,” explains Delia. “It’s equally important for purchasers to work with experienced financing professionals who can provide them with a range of innovative financing solutions.”

Most major manufacturers — from Kubota to Massey Ferguson — will have an in-house equipment financing company. Customers who are looking to purchase equipment are encouraged to visit their local dealer to learn more about the specific financing programs that are available to them.

Equipment financing and leasing, credit cards, insurance and equipment protection plans are the most popular. The convenience of obtaining everything customers need to buy right from their local dealer is a big advantage

Typically, these large finance divisions always have some special package deals in the work. For example, CNH Capital is offering a special financing program right now on Case IH Farmall tractors. Based on a retail contract date of March 1, 2007, with a retail price of $27,356, the customer provides a down payment of $5,468 and finances the balance of $21,888 at 0.00
percent per annum for 48 months. There will be 48 equal monthly installment payments of $456 each, with the first due on April 1, 2007. The total amount payable will be $27,356, which includes finance charges of $0. Companies run special offers like this throughout the year, especially in the spring.

“Financing for ownership is beneficial for those customers who have a desire or need to own the equipment asset at the end of the loan term,” says Delia. “Leasing is more beneficial for those who want the use of the latest equipment for the lowest payments.”

According to Delia, here are a few pros and cons of financing vs. leasing:

Finance — Financing is the traditional method for acquiring new equipment, because payments can be structured over a specified term, so that the customer will eventually own the equipment. If owning equipment is important to a customer, and they can’t afford to buy the equipment
outright, traditional financing is the best way to go.

Lease — Leasing offers advantages for certain customers such as those who do not need or necessarily want more assets on their books. In addition, leasing is a better option for those customers who want to conserve cash flow, because the up-front costs and the payments are
generally lower when compared with a loan. Leasing also offers tax advantages for certain customers. Because leases can be structured in a variety of different ways, they can be customized to fit a customer’s cash-flow needs.

Leasing can be advantageous for many commercial customers, but that generally does not apply to private users and large estate owners (who rarely lease equipment). But for businesses that are financing a compact tractor for professional purposes, a net present value (NPV) evaluation is another great way to compare loan payments.

If you have decided to purchase a major asset and are planning to take out a loan, a good way to compare the options available is to do an NPV of your cash flow under the various interest rates and terms your local lenders have available. Your cash flow projections should consider the loan payment outflows, as well as the revenue inflows that would result from your purchase or projects. Using a standard formula that includes things like time of the cash flow, time of
the project or purchase, discount rate, net cash flow and capital outlay, a financial appraisal of a long-term purchase can be determined.

“Most estate owners and a large percentage of compact buyers are using these machines for personal use,” says Barcuch. “Typically, these purchases are not a necessity and are more of a luxury purchase. NPV is more for commercial customers.”

Finding the best match between money and machine will be imperative for every customer. Just remember to always negotiate the payment schedule you want, don’t fall for expensive service contracts (although there are lots of good ones out there) and remember that used equipment may qualify for higher loan-to-value ratio. Always keep a high personal credit, keep your inquiries to lenders down (too many and some won’t do business with you), don’t be late with your payments and try to stay below 50 percent of your available credit line (especially on cards). Most of all, take your time. Shop around and find the right dealer, backed by a good financial division, and chances are you will discover that ideal chore tractor shinning on the same showroom floor.

Keith Gribbins is managing editor of Compact Equipment.