FINANCING FARM MACHINERY

For Irish Farmers or Agricultural Contractors paying cash for a tractor or machine can be a significant drain on your working capital. Leasing the tractor or machine, however, gives you access to the asset without paying for it all at once. All forms of leasing are basically rental agreements giving you (the lessee) the right to use an asset owned by the lessor (finance company) for a specific period of time in return for regular payments (rental payments). You can lease almost anything, from equipment valued at a few thousand pounds to machines worth millions. Leasing contracts are flexible and can be tailored to your needs.

When leasing, consider its effects on accounting, reporting, tax, and your cash flow. This section will give you a general overview. It does not replace professional advice. You may wish to consult your accounting and tax advisors before finalising a lease transaction to reap the maximum benefit and avoid complications.

· Direct Lease. You identify the machine (and negotiate the price) and arrange for the leasing company to buy it from the manufacturer (if new) or the previous owner (if used) to rent it to you.

· Sale-and-leaseback (also called purchase leaseback). You sell an asset you already own to the leasing company for fair market value or book written down value (whichever is less) and then lease it back.

In both cases, the lessor owns the asset, not you, and rents it to you. As with any other rental agreement, you return the asset at the end of the lease to the lessor. Some leases grant you an end-of-lease option to renew the lease at a minimal cost (secondary period) or to sell the asset to a third party as agent of the lessor.

Often equipment manufacturers themselves act as lessors or have an affiliated leasing company. This allows them to more easily help their customers finance transactions. The other two groups of lessors are banks and independent leasing companies.

· Finance Leasing (Full Payout Lease). You effectively acquire all financial benefits and risks without actually acquiring legal title. The leasing rate is computed to collect the full value of the asset (plus finance charges) during the contract period. At the end of the lease, the asset is sold to a third party and you can receive a share of the sale proceeds (if the lease is not being extended). Generally, you will not be able to become the owner of the asset at any time – unless a private arrangement is made with the third party. However, you usually have the option to extend your lease and as you will have paid for almost the full value during your initial lease period, the rental payments for subsequent periods will be minimal. And are often known as secondary leasing.

· Operating Lease. Often with a shorter time frame than financial leasing (always significantly shorter than the working life of the asset), operating leasing is more like a regular rental. The lessor expects to be able to either sell the asset in the second-hand market or to lease it again and will therefore not need to recover the total asset value through lease payments. There may be an option to extend the leasing period at the end (this negotiation can only take place at the end of the initial rental period). As with finance leases, you will not be able to become owner of the asset at any time but, contrary to financial leases, you will not share in the sale proceeds.

· Contract Hire. A form of operating lease (often used with cars and other vehicles) that includes a number of additional services such as maintenance, management or replacement if asset is in repair.

· Hire Purchase. This is an agreement for the hiring of an asset with an option to purchase. The legal title will pass to you when all payments have been made. The term of a hire purchase must be significantly shorter than the working life of the asset. You are able to claim capital allowances as if you had purchased the asset outright.

 

Often lessee’s are confused about what happens at the end of contract.

At the end of the lease term, you have various options. Lease contracts can stipulate that you

· return the asset;
· have the right to act as an agent to sell the asset to an independent third party; and/or
· can renew the contract or enter into secondary periods.

It is important for you to anticipate your future needs as each option has its advantages and disadvantages and will affect your monthly payments.
Seek the assistance of a professional advisor if you feel you need help!

Getting the right finance.

All types of financing offer different advantages and it is important that you assess your circumstances and needs before committing to a specific finance contract. Click here for a brief comparison. For example,  

If you want to own the asset straight away, an outright purchase (cash or loan/overdraft) might be appropriate;

If you may want to own the asset at some point in time and want to take advantage of instalment payments, hire purchase might be the best option;

If you do not want to own the asset at all but require it for most of its useful life, consider a financial lease; and

If you require the asset for a period of time significantly shorter than the useful life of it, consider an operating lease