Is Leasing Right for your Operation?
Before making that decision, it’s important to know how leasing works, its advantages and disadvantages, and in which situations leasing might be right for your farm.
Farm equipment can be extremely expensive; combines and tractors, for example, can cost hundreds of thousands of dollars. While buying equipment, either with cash or through a loan, was once the only option available to farmers, leasing has become an increasingly attractive choice.
How Leasing Farming Equipment Works
There are typically two types of leases available to farmers: operating and capital. An operating lease is where you basically rent the equipment, payments are treated as operational expenses, and the equipment stays off your balance sheet.
A capital lease is more like a loan, which allows the renter to use the equipment for a certain period of time, but for tax purposes, it is treated as if the farm owns it. While a capital lease offers the option to buy the equipment at the end of the lease, many companies will also offer equipment for sale at the end of an operating lease.
Typically, no down payment is required when leasing equipment. At the end of the lease, you can switch equipment for a newer model (and some companies allow you to do this mid-lease) or simply give back the leased equipment.
Here are just a few examples of the type of farming equipment that you can lease:
- Tilling equipment
- Haying equipment
- Semi-trucks/Highway tractors
The Benefits of Leasing
Get your equipment faster: Leasing agreements can often be turned around considerably faster than loans, and once your lease is signed, the equipment can be with you in a matter of days. This can be crucial to a farm’s successful season, for example, if a key piece of equipment breaks during harvesting. Having equipment available for one or two extra weeks can mean the difference between making a profit or a loss.
Stay up to date with the latest equipment: Leasing allows you to regularly update your equipment, which means your operations are constantly improving and becoming more efficient.
Save on taxes: Leasing can provide better tax breaks in the short term, because you can claim all of the leasing payments as expenses, rather than the depreciation in capital (which is a smaller amount, over a longer period of time). Discuss these tax breaks with your accountant.
Keep credit options open: Leasing equipment helps keep the door open for borrowing from other financial institutions, for other purposes. Your leased equipment isn’t treated as a liability on your balance sheet, so it improves your debt-to-asset ratio, which means securing a loan will be more likely.
Have better cash flow: Leasing allows you to keep hold of the cash you might otherwise have used for buying equipment. Also, you only have to make one relatively low, consistent payment per month, while the equipment you lease is making you money.
More manageable budgeting: Many lease payments can be structured seasonally. This means that you can increase payments in periods when you are making the most money, which can give you some respite in the off-season, when money is tighter.
Streamline your equipment needs: With leasing, you only lease equipment that you need. You won’t have the situation where surplus machines are lying around idle.
The Disadvantages of Leasing
You won’t automatically own the equipment: With most leasing agreements, you’ll get the option to buy the equipment at the end of the leasing period, but this will require an additional expense.
Payments can be endless: Unless you do choose to buy the equipment, your leasing payments continue for as long as you need it. For short-lived equipment, this won’t be an issue, but it could be a problem for more durable equipment.
Higher overall cost: Leases can have higher interest rates than conventional loans, so you might end up paying more over the course of the lease.
Is Leasing the Right Option for Your Farm?
This will all depend on your farm’s financial situation and equipment needs. Do you need to maintain your cash flow for crop inputs, or keep your credit options open for other capital expenses? If so, leasing may be a good choice. Will the equipment you need to lease become obsolete quickly? Then owning it may not make sense.
A Farm and Business Advisor can take a look at your financial situation and equipment needs to assess whether a leasing or loan option will work best for you. We are also able to recommend hybrid options, where you lease some equipment and buy others.