Guide
Leasing vs buying farm machinery on finance
When you're looking to acquire new assets like tractors, harvesters or spreaders, there are lots of different kinds of farm finance that could work. Let's take a look at the main features and pros and cons of each...
Words by: Auto Trader
Published on 6 August 2018 | 0 min read
Farm leasing
Farm leasing, also known as contract hire, is essentially a long term rental agreement. In other words, you pay a monthly fee for use of the item, and when the lease is up you can either give it back, or start a new lease.
Leasing agreements often include extras like maintenance and insurance, so you don't have to worry about something going wrong with the equipment. The simplest way to think of farm leasing is that you don't carry any of the burdens of ownership, because you never own the item.
Leasing agreements often include extras like maintenance and insurance, so you don't have to worry about something going wrong with the equipment. The simplest way to think of farm leasing is that you don't carry any of the burdens of ownership, because you never own the item.
Pros of farm leasing
The most obvious upside of using leasing for your farm equipment is flexibility. Leasing usually comes with a relatively short contract length, for example one or two years, so you're not committed for the long term.
Leasing also means you can adjust the equipment you're using to suit your farm, and add or subtract items as required - for example, hiring a second tractor after acquiring some new land. Leasing can also make sense for items you'll want to regularly upgrade, because it means you have the option to get a new item each time you renew your contract.
Leasing also means you can adjust the equipment you're using to suit your farm, and add or subtract items as required - for example, hiring a second tractor after acquiring some new land. Leasing can also make sense for items you'll want to regularly upgrade, because it means you have the option to get a new item each time you renew your contract.
Cons of farm leasing
The main downside of leasing is that it's always a cost, and you never own the asset. This means in the long run it can work out more expensive than purchasing outright.
The other disadvantage of leasing is that the lender might place restrictions on how you can use the equipment. Fundamentally, they're trying to ensure their farm equipment is in good condition when you give it back at the end of the contract - the upshot is, there might be stipulations such as mileage limits. You may also be restricted in the modifications you can make to the equipment.
The other disadvantage of leasing is that the lender might place restrictions on how you can use the equipment. Fundamentally, they're trying to ensure their farm equipment is in good condition when you give it back at the end of the contract - the upshot is, there might be stipulations such as mileage limits. You may also be restricted in the modifications you can make to the equipment.
Farm leasing - summary
- Flexible
- Short contracts
- Option to upgrade or add more equipment
- Maintenance often included
- You never own the asset
- More expensive that purchasing in the long term
- Lender may restrict mileage, modifications, or other usage
Hire purchase
On the other side is hire purchase. Like leasing, you'll have a monthly payment, but the difference is that these payments are going towards a purchase price and you'll eventually own the asset.
The simplest way to think of hire purchase is the old phrase "buying on finance" - it's a way of spreading the cost of an expensive purchase, rather than committing the lump sum up front.
The simplest way to think of hire purchase is the old phrase "buying on finance" - it's a way of spreading the cost of an expensive purchase, rather than committing the lump sum up front.
Pros of hire purchase
The main advantage of hire purchase is being able to make a big purchase without putting too much strain on your cashflow. Many farms will prefer to make smaller monthly payments instead of one big outlay, particularly if the farm equipment you're purchasing is expensive, or if it's a long-term investment that you'll use for the next decade or more.
The other key fact about hire purchase is that the monthly payment doesn't last forever - you own the item once you've finished the contract, so you can minimise the financial impact of buying new equipment. Perhaps a key piece of farm equipment comes to the end of its life at a bad time of year, and you can't afford an outright purchase but definitely want to buy a replacement for the long-term. This is a classic example of where hire purchase could be a good option.
The other key fact about hire purchase is that the monthly payment doesn't last forever - you own the item once you've finished the contract, so you can minimise the financial impact of buying new equipment. Perhaps a key piece of farm equipment comes to the end of its life at a bad time of year, and you can't afford an outright purchase but definitely want to buy a replacement for the long-term. This is a classic example of where hire purchase could be a good option.
Cons of hire purchase
This might seem like an obvious one, but buying something on finance via hire purchase is more expensive than buying it outright. That might make some farmers reluctant to consider it, but it's a question of perspective too. Put another way, the extra cost of hire purchase is what you pay the lender for the benefit of spreading the cost over time.
With hire purchase you'll normally have to pay a deposit and the VAT up front. Although the specifics will depend on the item and the lender, you'll need a bit of available cash before you can get your hands on the asset. Another downside of hire purchase is that it's not a very flexible form of finance. If you commit to buying something via HP, but then your situation changes, you're stuck with the equipment until you've finished making payments, because you normally can't sell it while there is finance outstanding.
With hire purchase you'll normally have to pay a deposit and the VAT up front. Although the specifics will depend on the item and the lender, you'll need a bit of available cash before you can get your hands on the asset. Another downside of hire purchase is that it's not a very flexible form of finance. If you commit to buying something via HP, but then your situation changes, you're stuck with the equipment until you've finished making payments, because you normally can't sell it while there is finance outstanding.
Hire purchase - summary
- Spread the cost of a large purchase
- Fixed monthly payments for a set period
- You'll own the item when payments are finished
- More expensive than paying cash
- Deposit and VAT often paid up-front
- Not as flexible as leasing
Tax implications worth considering
Tax is another area worth mentioning. To put it simply, leasing counts as a business expense and is accounted as an operating cost. That means it will reduce your net profit, which can have an impact on corporation tax.
Hire purchase, on the other hand, means the equipment appears on your balance sheet as an asset from the outset. This means it counts towards your assets and liabilities calculation. Every business is different, and you should discuss your tax position with a qualified accountant, but it's worth remembering that the different tax implications of leasing and hire purchase might weigh into your decision.
Hire purchase, on the other hand, means the equipment appears on your balance sheet as an asset from the outset. This means it counts towards your assets and liabilities calculation. Every business is different, and you should discuss your tax position with a qualified accountant, but it's worth remembering that the different tax implications of leasing and hire purchase might weigh into your decision.
Final thoughts
There's a lot to think about with leasing and hire purchase, and it's an especially complex area for farmers. On one hand, you're always going to need a few key pieces of machinery - but on the other hand, technology moves on quickly and you'll want to take advantage of new developments in farm equipment.
The main things to think about when choosing agricultural asset finance are flexibility and what your future looks like. In other words, if you're not exactly sure what equipment your farm will need in a few years, leasing might be the safe option. That way, you can adjust your inventory of equipment to suit the changing needs of your farm. Or maybe you want to make an investment in an expensive item that you know you'll use for years to come. In these kinds of situations, hire purchase is a good way to bring new assets into your farm without tying up a big chunk of your cash.
The main things to think about when choosing agricultural asset finance are flexibility and what your future looks like. In other words, if you're not exactly sure what equipment your farm will need in a few years, leasing might be the safe option. That way, you can adjust your inventory of equipment to suit the changing needs of your farm. Or maybe you want to make an investment in an expensive item that you know you'll use for years to come. In these kinds of situations, hire purchase is a good way to bring new assets into your farm without tying up a big chunk of your cash.