Do you need to acquire a piece of agricultural equipment or a farm building to replace one that has worn out or to expand your operations? Leasing may be a great option for you.
No matter what you are producing, there are a variety of agricultural buildings and equipment you need to be successful:
• Livestock housing specific to the type of animal: hogs, dairy cows, beef cattle, sheep, and poultry.
• Other types of storage structures: grain silos, refrigerated milk tanks, feed storage barns, hay barns, wine tanks, and equipment sheds.
• Larger-scale farm technology that supports the process of production: tractors, combines, sprayers, irrigation equipment, planters, and more.
• Solar panels and other large energy saving devices.
What will it cost to purchase one of these items outright? These items start at the high five figures and rise well into the millions of dollars. At some point, you will be in the market for one or more of these big-ticket items because you need to grow your business or replace something that is no longer functional. Leasing may be a better option to get what you need, when you need it. It may also be tax-deductible, which could help accelerate your depreciation. Always consult your CPA to confirm the tax situation.
Leasing vs. Buying Farm Buildings and Equipment
Buying an agricultural building or equipment requires a large upfront cash outlay. This is cash you could be using for other operational needs and/or to protect against future emergencies. Additionally, these items will typically not appreciate in value over time.
Instead, if you decide to lease what you need, there can be many positives that arise:
1. Lessening the impact on your cash flow to acquire what you need. Lease payments are typically smaller than what you would have paid to buy the building or equipment outright. That cash can then be available for your other business needs.
2. Gaining more features/functionality than you could have afforded otherwise. Equipment has become more sophisticated, providing automation and capabilities that can extend your reach – without adding more workers. With that functionality comes more cost. Leasing lets you access those advantages without buying it outright. It can provide you with an opportunity to “test the waters” for the functionality before buying and/or smooth out the costs of acquiring what you need on a payment schedule through the lease.
3. Have the right equipment when you need it. You may only need a piece of equipment for a few seasons. You may not have the capital right now, though you need the storage building immediately. Leasing provides the flexibility to contract for what you need and get it when you need it.
4. Taking advantage of any tax breaks. Farm equipment and buildings that are leased vs. purchased fall under different tax rules. Depending on what is being leased and the associated terms (costs, etc.), there may be some tax benefits for you. Leased elements are depreciated differently. For example, if you purchase a multi-purpose building, depreciation would typically occur over 20 years, or even 39+ years if it serves as your office. If leased, those payments could be tax-deductible, and the asset would depreciate much more quickly. As always, you’ll definitely want to talk to your tax advisor about whether this is a benefit for your situation.
5. Becoming eligible for grants and other sources of money or savings. In addition to the other benefits above, if you lease solar panels, you may also be eligible for grants and programs like Rural Energy for America Program (REAP). For example, a dairy farmer can get a REAP grant for a large portion of the solar panels’ cost and a lease for the remainder. The savings in energy can pay for the panels during the term of the lease.
6. The process can be quicker and easier than a standard loan process. Lease financing for a building can help accelerate you to the building phase. Here at First Financial Bank, if you have your financial statements ready, you can navigate lease financing for a building or piece of equipment for less than $1 million in as few as days. If the price is over $1 million, it might take a bit longer.
What are some of the downsides? There are two in particular:
1. You can’t use it as collateral for another loan. Since you are only renting the building, it is severed from your current real estate value until the lease is paid in full.
2. You may pay more in the long-term. The lease enables you to preserve your working capital to be used for other needs in your operation. When the lease expires, if there is a purchase option, you may have spent more than if you had bought it outright initially – but depending on any tax advantages, this may be closer to a break even overall.
Again, there may be tradeoffs in tax liability and the cost of money that you’ll want to consider. Work with your accountant or tax advisor to run the numbers.
Partnering with Your Lender for the Best Approach
When considering acquiring a new structure or piece of equipment, you will want to work with your lender to consider the optimal approach for your situation. They can help you evaluate your current situation, taking into account the different factors:
• Current debt load and structure.
• Your tax liability standing.
• Other needs and plans in the works.
