When it comes to acquiring farm equipment like tractors, combines, and implements, farmers have two main options - leasing or buying. Both options have their own set of advantages and disadvantages that should be carefully weighed when making equipment decisions for the farm operation.
Typically, the choice between leasing vs. buying farm equipment depends on factors like upfront costs, long-term costs, tax implications, flexibility needs, and ownership desires. In this article, we will explain the advantages and disadvantages of leasing vs. buying farm equipment to help you decide what best fits your needs.
Advantages of Farm Equipment Leasing
Here are some of the benefits for farmers if they lease farm equipment:
1. Lower Upfront Costs
A primary advantage of leasing farm equipment is that it is more favourable than purchasing because leases involve smaller initial capital expenditures. The initial payment requirements for leasing are typically restricted according to usage but do not require full equipment purchase costs like buying.
2. Predictable Costs
The leasing of farm equipment provides farmers with predictable monthly payments for the entire lease period. The cost stability allows farmers to establish better budgets through predictable financial planning since ownership of equipment demands irregular expenses.
3. Tax Deductions
The lease payments made each month are usually 100 percent tax deductible as a business operating expense for the farm. This can provide some modest tax savings for the operation. Typically, if the equipment is purchased outright, only the depreciation on the equipment can be expensed annually on taxes.
4. No Maintenance or Repair Costs
When you lease farm equipment, the monthly payments include repairs and maintenance. The lease company handles any mechanical issues or servicing as part of the agreement. This saves farmers the extra costs and hassles of repairs and maintenance.
5. Flexibility
It usually involves shorter-term commitments than buying, offering farmers more flexibility. Lease terms vary from one loan provider to another. This allows farmers to scale or change equipment more easily to meet evolving needs.
6. No Debt Obligations
Leasing does not require farmers to take on as much debt as an outright equipment purchase might. Some banks or Non-banking Financial Companies (NBFCs) may also view limited debt exposure favourably when considering operating loans. This allows farmers to save borrowing capacity for other needs.
Advantages of Purchasing Farm Equipment
Below are the advantages of purchasing farm equipment:
1. Building Equity
The key advantage of buying farm equipment is that it allows farmers to build equity as they pay down the value of the equipment over time. Each loan payment gives them an increased ownership stake in the equipment. With leases, payments cover just the equipment’s use, and no equity is built.
2. Long-Term Cost Savings
Over the long term, buying equipment can cost less than leasing if the equipment lasts beyond when the loan is paid off. But for buying to save money, the equipment must be reliable and properly maintained for many years. If the bought equipment breaks down frequently or needs major repairs, the savings may never materialise.
3. Customisation Ability
When farmers buy equipment, they can customise it to perfectly meet their needs by selecting specialised features or attachments. With leased equipment, customisation options are far more limited or non-existent. Farmers get what they are given in the lease contract.
4. Full Control
Ownership grants farmers complete control over the equipment, including decisions about maintenance, use, storage, and eventual sale or trade-in. A lease agreement does not restrict these issues. However, full control also means more management responsibilities.
5. Tax Benefits
In some situations, the tax benefits of buying equipment can outweigh those of leasing. These include larger, more accelerated depreciation deductions, investment tax credits on some equipment, and no sales tax charged on trade-ins. The specifics vary greatly based on individual circumstances.
Disadvantages of Leasing Farm Equipment
The disadvantages of leasing farm equipment are as follows:
1. No Ownership
Farmers do not gain any equity towards ownership of the equipment by leasing. At the end of the lease term, they simply return the equipment unless they opt for a costly buyout. And any investments made in customisations or add-ons are lost.
2. Costs Can Add Up
While leasing costs are generally fixed and predictable month-to-month, these ongoing payments can really add up over multiple years, leading to higher long-term costs. The lack of eventual ownership for all those payments can make leasing an expensive proposition.
3. Extra Fees and Penalties
Leasing companies often charge some extra fees like acquisition fees, documentation fees, end-of-lease fees, etc,. that drive up costs. Early lease termination or excess wear penalties can also result in farmers paying thousands more than the regular lease payments. It is important to fully understand these possibilities upfront before signing a lease.
4. Lack of Control
Leasing equipment gives farmers much less control over its use, storage, operation, and customisation compared to ownership. There may be restrictions on everything from the number of acres covered to who can operate the equipment, which limits flexibility for the farm business.
Disadvantages of Purchasing Farm Equipment
Here are some of the cons of purchasing farm equipment:
1. Large Upfront Costs
The most obvious disadvantage of buying farm equipment is that it requires a major outlay of capital to cover the full purchase price, trade-in allowances, taxes, etc. This drains cash reserves the farm business relies on for operating expenses until borrowed money can be secured.
2. Debt Obligations
To buy expensive equipment generally requires taking on significant debt in the form of loans, lines of credit, or other financing. The resulting long-term debt obligations can negatively impact the farm’s financial health. High debt loads and loan payments also reduce flexibility to address other needs.
3. Repair and Maintenance Costs
The responsibility for ongoing repair and regular maintenance costs falls completely to farmers who own equipment. Overhaul expenses, in particular, can reach thousands of Rupees and may be difficult to budget for. By comparison, these costs are covered in lease agreements.
4. Risk of Redundancies
Purchasing equipment that rapidly becomes obsolete due to technological advancements or changing farm needs is a real risk farmers take with buying. Trade-in value declines sharply on equipment that is no longer current, while lease terms are generally shorter.
Conclusion
Deciding between leasing and buying equipment is a complex decision for farm businesses, as there are compelling arguments on both sides. Farmers need to carefully assess their capital position, ownership goals, flexibility needs, tax situation, and overall financial management preferences when weighing between the two options.
Typically, leasing makes more sense for those wanting to preserve capital and liquidity, while buying enables customisation, control, and long-term ownership. The right choice depends significantly on the unique circumstances of the individual farm business.
