Farm equipment is one of the biggest ongoing purchases farmers will make.
When deciding on what’s right for your operation, there are many factors to consider, from land and soil type to machine performance and design. As with any major investment, you also have to choose the right fit for your finances.
The question is: Is it better to buy or lease farm equipment?
There are pros and cons to each option, and your choice will depend on your specific needs and business goals. The task at hand is to gain a better understanding of both approaches so you can make an informed decision.
Option #1: Buying farm equipment
“Some farmers may prefer to own their equipment simply because it’s theirs and they don’t have to worry about a leasing company owning it,” says Heather Karst, market director of business banking at our Innisfail branch.
Beyond pride of ownership, there are tangible financial benefits as well. One advantage is that owning farm equipment outright lets you build equity from the outset. It also gives you more flexibility in terms of when and how you use the machinery since you’re not tied to a lease. For example, you can modify the equipment to suit your needs and sell it if you no longer need it or are ready to upgrade. With money from the sale, you can reinvest in new equipment or other areas of your business.
Since buying farm equipment requires a big capital commitment, it usually involves getting a loan, which farmers can work with their trusted advisor to set up.
Owning may be more economical if you plan to keep the equipment for a long time. But when you’re crunching the numbers, you’ll need to consider the cost of maintenance and repairs that aren’t included in the warranty.
Keep in mind, too, that if you are planning to keep machinery for the long haul, you may not have the same flexibility to upgrade your equipment as you would with leased equipment. This could be a drawback if you’d like to access the latest technology advancements in agriculture on a regular basis. If you decide to sell, you may not get top dollar for your used equipment because of price depreciation.
Option #2: Leasing farm equipment
Given the many benefits of ownership, why lease?
“The main benefit is helping your cash flow,” says Wyatt McGraw, account manager of inside sales at Stride Capital, a subsidiary of Servus Credit Union. “If you are tight on cash, leasing is extremely helpful, as there are limited upfront costs and you make a monthly payment for the equipment instead of one large lump sum.”
Farmers can also tailor their lease payments. “Considering farmers’ pay can be erratic based on their crop, they can take advantage of payment structures such as seasonally reduced payments or semi-annual payments,” he adds.
Leasing is also a good option if you want to access specialized equipment for a set period or regularly upgrade your farm equipment. “If a farmer knows they like top-of-the-line equipment and they will be upgrading every few years, then leasing is more advantageous,” says McGraw.
Karst notes that larger farming operations may favour leasing because the sheer size of the farm can be hard on equipment. “With leasing, you’ve always got the latest technology and a new warranty,” she says. “You’re able to call the dealer and they’ll come out to do service.”
Having ongoing warranty and technician support can also reduce risks, such as lost revenue from downtime during repairs, when it’s particularly busy on the farm. However, this could be viewed as a drawback for some farmers. Since you aren’t the owner, repairs and modifications will need to be done by the dealership, which reduces your flexibility.
If you’re not sure whether buying a machine outright would be worth it, leasing lets you give it a “test drive” of sorts. Lease agreements also give you an option to buy out the equipment for a nominal amount at the end of the term.
The potential downsides include having a limited range of options available for lease, higher interest rates in some cases, and not having the same opportunities for equity as buying. “Although you can capitalize on your equity at the end of the lease term, if you buy outright, you can cash in on that equity at any time,” says McGraw.
Whether you decide to buy or lease, Servus is here to support your business and help you grow. Reach out if you’d like to speak with us about your farm or agri-business needs.