When it comes to deciding whether to purchase or lease equipment for a family farm or smaller crop production operation, historically most farmers probably would have told you that buying the requisite machinery is paramount to running a profitable farm.
The logic seems obvious: as with any business, purchasing the tools of your trade puts you in the position of owning valuable assets that you can sell in the future. Among other perceived advantages, it also provides you with an asset value that not only looks good on a balance sheet, but can be used as collateral against future loans.
While this is all true, leasing equipment offers a variety of advantages that are well worthy of consideration for many independent farmers. The following explains a few of the key advantages of leasing farm equipment over purchasing it outright.
Maintaining a steady, comfortable cash flow is a common struggle among many smaller farms. The problem is that crops tend to be erratic, unpredictable commodities, and given that a farm's cash flow is typically generated from its latest crop, one bad season can place a heavy burden on the entire operation.
In such cases acquiring machinery through a bank loan can translate into costly down payments, in addition to the healthy interest payments associated with owning. For a smaller or struggling farm operation, these costs can simply be impossible to realize, regardless of the improved productivity that acquiring such machinery might generate.
Leasing, however, enables farmers to keep more working capital on hand. This capital that can then be applied to other projects, growing the business in different ways. Plus, leasing utilizes operating capital as opposed to investment capital, and in many instances payment schedules to the lessor can be arranged to coincide with periods of higher cash flow.
In times of low interest rates in particular, lease payments are more malleable and better suited to meet the genuine business needs of farm operations than conventional loans.
Unless you were able to purchase your machinery with cash, you'll be required to make monthly payments to your creditor -- regardless of whether you buy or lease.
In most cases, your payments are going to be less with a lease than a loan. Rather than the take it or leave it attitude of many traditional lenders, leases are generally negotiable to a certain extent, giving you the opportunity to broker the best deal for yourself as possible. This can help further reduce your annual expenses while improving your monthly cash flow.
Consistent with technology in general, farm equipment also continues to improve and grow more advanced as the years go on, with every indication that the pace of agricultural innovations will only hasten in the future.
When you purchase an expensive piece of farm equipment, within a few years you're almost guaranteed to be behind the latest tech curve, putting your productivity and ability to compete in the marketplace in jeopardy. If you've just purchased a new tiller, harvester, or tractor, for example, you may therefore find it painfully outdated before you've even paid off the loan you took out to pay for it.
Farm equipment leasing gives you the ability to upgrade pretty well any time you want; you simply release your current equipment – a tractor, for instance -- in order to lease a newer, upgraded model. Lease terms are typically short, between two and five years in most cases, so you'll never fall too far behind the latest innovations no matter how you choose to play it.
Compare this with owning an outdated tractor. Once it's no longer the latest in cutting edge farm equipment, potentially incapable of meeting the new, real world issues that have arisen since you first purchased it, the resale value of said tractor will be a mere fraction of what you originally felt it would be worth when it came time to sell it and upgrade. That's obviously going to hurt your bottom line.
Because farmers rely upon the full functionality of their equipment on a daily basis, it's critical to the overall success of the business that it constantly be well-maintained, with repairs performed as soon as any given problem arises. But as equipment ages, the accumulated cost of repairs gradually increases. The more you use any given machinery, the more repairs it will likely require.
While most leases require lessors to adequately maintain their leased equipment and cover any repairs not covered by warranty, given that this machinery is typically brand new, repairs are fairly unlikely to be required over the course of a typically short-term lease agreement.
This is a particularly relevant advantage to leasing if you lack the ability to repair your own machinery. Plus, leasing ensures that the equipment you need is always available and in good condition.
Some farmers opt for leasing because they believe it puts them in a better tax position. While this assertion is case specific and somewhat debatable, leasing does provide certain advantages over owning when it comes time to deal with the taxman.
When you purchase equipment, it goes into your Undepreciated Capital Cost (UCC) pool and depreciates over a certain period of time, which can be substantial. With an operating lease, however, every year you can write off the entire amount of your leasing costs, saving you taxes immediately, rather than at some time down the road.
Leasing farm machinery rather than purchasing it outright reduces your financial risk substantially. Plus, the improved cash flow consistent with leasing equipment is of particular benefit to farmers in light of the erratic nature of their business, where one bad season can radically change a farm's available capital.
While not necessarily the perfect solution for every farmer, leasing typically makes a lot of sense for smaller farm operations.
Our experts can help you build an equipment leasing and financing program that fits your needs. Contact us to find out more.