Cutting Cash Needs on Your Farm? Try Leasing Iron

  • 01

    There are quite a few differences between leasing and financing/owning farm machinery and equipment. The former might be a better option (though ginning up less equity) than the latter during a downturn in income, one expert says. So, should you lease or buy?

  • 02

    "When farmers consider acquiring equipment, they often think of their payment option as a 'lease versus buy' decision. In any economic environment, financing equipment through a lease or loan will enable your business to preserve its cash," says William Sutton, president and CEO of the Equipment Leasing and Financing Association. "In evaluating your options, it is important to look at each alternative to determine which will best balance usage, cash flow and your financial objectives."

  • 03

    So, keep these 10 considerations in mind when making the 'Lease vs. Loan' decision. First, how long will you use the equipment? If it's less than 3 years, leasing is likely best. More than 3 years? Financing with a loan might be your best option.

  • 04

    Keep a good budget and in times when budgets are tight, go with what's cheaper. And, think monthly, just like other bills. "As with any ongoing business expense, consider the monthly cost for a piece of equipment and how it fits into your budget," Sutton says. "In general, leasing will provide lower monthly payments."

  • 05

    Will it age too quickly while you lease or own it? Some machinery becomes obsolete quicker than others. Keep that in mind. Some lease options may take this into account. "Protection against obsolescence is one of the many benefits of equipment leasing, since the risk of obsolescence is assumed by the lessor. Certain lease financing programs allow for technology upgrades and/or replacements within the term of the lease contract," Sutton says.

  • 06

    Not using it? Don't pay for it! A piece of farm equipment's not like a pickup or car -- if you're not using it, you're not making money with it. "If a piece of equipment has limited use within a specific contract and won’t be used for other projects, it’s not ideal for it to be idle while you continue to make payments on it," Sutton says. "It makes sense to stop the equipment expense when the income from it ceases, which you can do with a lease."

  • 07

    Cash needs. If you're leasing, you may be able to get away with not paying much up front. If you're buying, it's a different story. But, a down payment also means early equity if you can swing it. "Loans usually require a down payment and don’t include the other cost benefits," Sutton says. "Ask how much of a down payment is needed and assess the availability and desirability of allocating company capital for that down payment."

  • 08

    If you're financing with a loan, you'll get depreciation tax benefits. Leasing doesn't net you the tax benefits, but you also don't shoulder the depreciation itself. "A loan provides you with the depreciation tax benefit; with a lease, the lessor owns the equipment and realizes the tax benefit," Sutton says. "If your business cannot use the tax benefit, it makes more sense to lease than to purchase through a loan."

  • 09

    Do you have a line of credit for your farm at your local bank? If you've got ample credit, consider a loan. But, if you're concerned it will stretch your bank credit too much, leasing may be a better option since a different institution's likely handling the line required to get the equipment. "It is often possible to preserve your bank working capital by leasing equipment through an equipment finance provider," Sutton says.

  • 10

    Check your options, whether you're leasing or buying via a loan. If you think you'll need to be flexible down the road with things like trade-ups or financing terminations, you may be better off leasing, Sutton says. "The lease term allows your business to match all expenses to the term of the equipment’s use, including income tax expense, book expense and cash expense," he adds.

  • 11

    A financial downturn might not be the time when you're thinking about expanding your farm, but if that happens to be in the cards, a lease might be best. "If your business is planning for growth, you can enter into a master lease that will allow you to acquire multiple pieces of equipment under multiple schedules with the same basic terms and conditions," Sutton says.

  • 12

    Don't go in blind. Check with your accountant, ag lender and equipment dealer financing provider before you make any decision to lease or buy equipment during a time when farm revenues are sliding, Sutton says. "Whether you finance equipment through a lease or a loan, each has its advantage," he adds.

Leasing and buying both have pros and cons. See how leasing might help you trim your cash needs during the corn & soybean downturn.

Read more about