In Tight Times, Leasing Might Be An Option
While most farmers and their lenders prefer purchasing assets, leasing might be option in periods of tight cash flow and limited liquidity.
“Leasing offers some unique financial solutions and cost-saving benefits when compared to traditional ag lending,” says Terry Keller, a senior leasing specialist with Compeer Financial based in Northfield, Minn. Among them:
Less upfront costs. In many cases, leases can provide 100% financing with just the first payment due in advance. That’s often far less than the 20 to 30% down payment required for buildings or equipment. “Without having to come up with a large down payment, leasing may be an option to consider that will allow you to attain that additional equipment or expansion without sacrificing working capital or cash flow,” he says.
Flexible terms. A lease can sometimes provide flexible terms, timing payments with income. That can be especially helpful for farms which have cash crops or market cattle seasonally.
Tax benefits. “When structured accordingly, the IRS does not consider a lease to be a purchase but rather a tax-deductible expense. Because of this, you can deduct the entire lease payment from your gross income,” says Keller. When you purchase an asset with a loan, the interest is immediately deductible but the depreciation of the asset is typically deducted over a longer time period.
Estate planning. If a farming couple is nearing retirement, an asset can be leased and does not become part of the estate with a properly structured lease agreement. At the end of the lease, a son or daughter farming with the parents can purchase the tractor at the lower, buy-out price. “Mom and Dad were able to get the tax deduction, and son [or daughter] ended up with a quality tractor at a reasonable price,” says Keller.
“During a time of tight margins farmers are continually looking for ways to preserve working capital, cash flow, while also being cognizant of their desire for growth,” says Keller. “When looking to finance equipment, vehicles, a new structure or facility, I encourage you to consult with your lender and tax partners to gain insights into whether a lease or a loan is a better option for your operation.”
For more information on leasing,