Financial experts describe impacts on credit, cash flow
By CAROL RYAN DUMAS
There's no easy answer -- or even one answer -- when it comes to the best option on farm equipment.
"The decision to buy or lease varies with each operation and the financial goals of the operation. No two operations are identical," said Ron Moore, president of Pacific Northwest Hardware and Implement Association, which includes PNA Financial Services.
Machinery and equipment acquisitions are normally made in one of three ways: cash, loans or leases.
Leasing equipment is often a misunderstood concept but one that can have a positive impact on cash flow, he said. A lease allows an operator to have the equipment he needs for only the time he needs at a lower cost than buying without long-term ownership and repair costs.
It also gives him options at the end of the lease. He can extend the lease for a specified term, purchase the equipment at the stated purchase option, or return it.
Leasing might be a good solution for an operation with the following goals: improve cash flow with lower payments; minimize taxes, depending on depreciation; manage equipment obsolescence; or improve operating efficiencies by having the most up-to-date equipment.
Because a new acquisition will change a farmer's financial systems, Anthony Travis, North American leasing manager for CNH Capital, said his company looks at three things when determining the best option: accounting, taxes and economics of the transaction.
If a farmer purchases equipment, he's adding debt to his financial statement, and that might be a burden he cannot afford. When approaching a purchase decision, people ask themselves a lot of questions: "Can I afford to put that debt on my books? How does that affect my account statement? Can I afford it? Maybe I should keep cash in the bank."
Those are important considerations, because a purchase will increase a farmer's debt structure and could affect his credit.
"The higher debt-to-income ratio could lead to higher interest rates on other loans, such as operating loans, or he could be denied another loan altogether," Travis said. "That's where leasing can help. A lease would be added to the expense sheet, but it doesn't impact debt."
Buying equipment could provide a tax shelter through depreciation, which often would be beneficial.
"On the other side, he can lease and not take the depreciation because he doesn't need it, and save the money," he said. "For example, under Section 179 of the Internal Revenue Code, a producer can write off $250,000 of the first $800,000 in equipment purchases. But say his purchases are up to $790,000, he wouldn't gain much of a tax break by buying another piece of equipment. In that case, leasing may be a better option."
While some folks choose to buy solely on the equity they'll retain on the back end, the biggest factor why some producers lease is so they don't have the hassle of disposal.
"Some farmers lease solely on the fact that when the lease is over, they give it back -- and get new equipment that's under warranty," Travis said.
The second leading factor in the economics of the transaction is that there's no out-of-pocket, upfront cost in a lease, and the cost is usually less than a loan payment.
"On a flat-line basis, a lease is lower than a loan payment, considering interest on the loan," Travis said. "A producer needs to have his financial team in the loop when considering purchasing or leasing to know what impact either would have on his tax sheet, accounts and cash flow."
Moore agreed, saying, "Several resources are available to assist in the decision whether to buy or lease. My advice is to consult with the accountants, auditors, attorney and farm equipment dealers when deciding to buy or lease."
For help in determining equipment options, go to: http://cropwatch.unl.edu/web/cropwatch/survivinghighinputcosts and scroll down to "machinery management."
Pacific Northwest Hardware and Implement Association: www.pnwassoc.com
CNH Capital: www.cnhcapital.com