Your equipment is one of the largest costs around your farming operation; in fact, only your land is more costly.
If you’re starting a new farm, the financial outlay required for even basic machinery can seem overwhelming; fortunately, you have several options available to you. Most farmers choose either to buy outright or to lease, and it’s important to understand the ins and outs of each option before deciding which one is right for you.
Buying farm equipment
For many farmers, buying equipment is the obvious choice, and it does offer several advantages.
The most prominent benefit of owning equipment is just that — you own it. That means you can count it as an asset on your balance sheet and deduct the expense from your taxes (check with your accountant to make sure). And since owned equipment is an asset, you might be able to use it as collateral for other loans.
Buying your equipment outright also means you won’t be tied to a lease contract. In addition to requiring a long-term commitment, many leases contain limitations on the number of hours the equipment can be used and/or the types of work it can be used for.
Of course, buying equipment has disadvantages as well as benefits. As the owner of the equipment, you’ll be responsible for all maintenance and repair costs, including replacement if and when needed. And while it does count as an asset, that asset will depreciate over time. Finally, some equipment purchases may require a large down payment that’s difficult for some farmers to come up with, especially if you’re just starting out.
Buying equipment may be a better choice if you
- Need reliable equipment that you will use regularly over the long term
- Want the tax advantages of ownership
- Want the flexibility to sell/replace the equipment at your discretion
Leasing farm equipment
Leasing is also a popular option, and while it’s tempting to think of leasing as a “cheaper” alternative to purchasing, it’s important to understand all the implications before you decide.
In its simplest form, leasing involves signing a contract to use the equipment for a set period of time in exchange for a deposit and regular monthly payments. Since the equipment is owned by the company that leases it, it will not count as an asset on your balance sheet and therefore can’t be deducted on your tax return. On the plus side, your payments also won’t count as debt on your balance sheet, since you’re paying for use of the equipment only and not financing the equipment itself.
As you explore leasing as an option, you’ll notice that contracts can take on different forms. One of the most common is the “net lease,” in which the lessee makes monthly payments to the leasing company for the equipment use only; taxes, insurance, and other costs are handled separately. Some other leases roll these additional costs into the monthly payments, and some incorporate warranty and repair plans as well.
Many new farmers prefer leasing due to the lower up-front costs; lease deposits tend to be much smaller than down payments for purchase. However, it’s important to note that in most cases, the overall cost of buying equipment is lower than the overall cost of leasing.
Leasing may be a better option if you
- Don’t expect to need the equipment longer than 5 years
- Want access to new technology without committing to ownership
- Are looking for lower up-front costs
A third option: renting farm equipment
If you only need a piece of equipment for a short amount of time, even if that need arises annually, renting can be a viable third option. Depending on the size of your farm and the timing of your growing seasons, you may want to rent equipment for jobs like plowing and tilling. Renting for short-term uses prevents you from having to pay for and store the equipment while it’s sitting idle.
Securing the equipment you need to run your farm is one of the biggest decisions you’ll make. Before you sign on the dotted line, make sure you understand thoroughly the pros and cons of buying, leasing, and renting. And of course, if you need assistance with financing your equipment, your friendly Heritage Land Bank loan officer is here to help.
GUEST CONTRIBUTOR: Heritage Land Bank…our name says it all. Our heritage, spanning nearly a century, has been and always will be, to help people like you, who have a love of the land and an fiercely independent, country spirit. We make it our business to finance your hopes and dreams, no matter the size, from country homes and recreational property to building and growing your agribusiness, ranch, or farm.