Leasing Can Help Manage Your Cash Flow
Leases can be an excellent option, which can be used for just about any farm-related vehicle such as: machinery, new and used equipment and facilities such as machine sheds, trucks, grain bins, combines, irrigation systems, tractors, buildings for livestock and any other equipment you need for your farm. Since a down payment is not required, you can lower the initial outlay of your cash, which will free up your working capital that can now be used elsewhere. Lease purchases and payment options are usually known and fixed in advance, which provides you with opportunities to manage your cash flow as well as peace of mind.
Loan or lease?
It all depends on available cash, your tax situation and long-term business objectives.
Every day, farmers wrestle with the same decision when it's time to acquire new equipment on credit: Should I borrow or lease?
Each option has its own set of advantages, and what your neighbor does may not be the right choice for you. In fact, what you did last year may not make good business sense this time around.
Your decision depends upon several factors, including business goals, current cash flow, tax objectives and negotiating leverage. Whatever your choice, you can get help from MidAtlantic Farm Credit. We provide a broad range of loan options, and we offer convenient leasing services.
How a lease works
You must make regularly scheduled payments-balance plus interest-over the life of the loan, normally from two to seven years. You enjoy exclusive use of equipment over a portion of its useful life. Leasing assumes that you generate profits from the use of equipment, not its ownership. At the end of the term, you can renew the lease with payments based on the equipment's current value, buy the equipment or return it to the leasing company.
Advantages of leasing
- Cost-effective. The biggest advantage of a lease is that it is usually less expensive, especially when interest rates are low.
- Convenient. Especially for businesses with established lines of credit and strong relationships with their lenders.
- Flexible. You can choose a fixed or variable rate, and loan contracts often allow you to trade or sell the equipment at any time.
- No down payment. (Although first payment is due in advance.) Payments are calculated to cover the diminishing value of equipment over time, not the full acquisition cost.
- Enhanced cash position. A lease frees up capital and keeps existing lines of credit open for other purposes.
- Tax benefits. Payments are generally 100% tax deductible on income taxes for the life of the lease. In some cases, this allows faster write-offs compared with depreciation calculations over the life of purchased equipment.
- Are you a dairy farmer? If so, find out how you can lower your taxes with an equipment lease; read this article by John Greenleaf of Farm Credit Leasing.
Disadvantages of a lease
- Loss of cash. Once a business surrenders cash for a down payment, it's no longer available for other purchases or emergencies.
- Risk. You may be reluctant to incur additional debt and may not want to risk losing the assets pledged to secure the loan.
- Cost. A lease typically costs more over time compared to cumulative loan payments, However, this must be weighed against the expenses of the entire operation-availability of ready cash may be a higher priority.
Which is right for you?
The best way to find out if a loan or lease is right for your business is to call or meet with your Farm Credit account executive. He or she will review your business goals, cash flow situation and tax picture and suggest the most appropriate course of action to obtain the equipment that you want.
