Which is best for you?
With summer nearly here, farmers across the country are working through the growing season and preparing for harvest. As a producer, you are not only responsible for your crops, but your entire operation. This includes managing finances, determining risks, paying wages, handling employees, maintaining equipment, keeping records...the list is unending. A farmer’s job is never done!
One of the crucial parts of this job is managing your assets. This involves investing in new equipment, storage solutions, or land. The old adage ‘you reap what you sow’ applies to farming of course, but also to growing your business. The decisions and actions you take now will affect your future. With commodity prices at a high since 2011, it’s a great - and critical - time for Canadian farmers. How can you make the most of this opportunity?
Maybe you need to increase your storage to manage inventory. Maybe you want to upgrade your equipment to increase your productivity. Maybe you need to look at investing in other parts of your operation. Once you’ve decided what you need to do to maximize your business, comes the crucial decision of financing your investment. That’s where we can help.
Buying or Leasing
When it comes to adding equipment or storage, you have two options - to buy them outright or to lease them for a certain period. Ultimately, it depends on your specific situation. Both choices have their advantages.
Advantages of buying
You can buy equipment or storage (including grain bins or service buildings) in two ways. One is to use the funds you already have to make purchases. This could mean dipping into your savings or redirecting a part of your profits back into the business. The second option is to take an agricultural loan. When you take a loan, you can buy your equipment or storage right when you need it without liquidating any investments. Before you decide which method of payment - paying from your pocket or getting a loan - would be better for you, here are some of the advantages of buying.
You can claim operating expenses
When you buy equipment, storage bins or construct a service building, you can claim the expenses on your taxes. The money you spend on purchasing equipment or storage items is counted as an operating expense. Operating expenses are tax deductible. That means they are considered necessary for your business and lower your taxable income. As a result, buying your equipment or storage, or anything else you need, will help you save on taxes.
You can claim loan interest as business expenses
You do not have to buy equipment or storage from your own savings. You can opt for an agricultural loan that is specially created to help farmers like you with their farming expenses. Of course, you will have to pay some amount of interest on your loan. However, many lending institutions like credit unions offer attractive (which really means lower) interest rates. So, you won’t have to pay a hefty amount of interest on your loan. The cherry on the top? You can claim your loan interest as a business expense. That’s another way buying helps you save on taxes.
You can defer the cost
Another tax benefit from buying! They just keep adding up, don’t they? When you buy equipment or storage, you can defer their costs on your balance sheet. That means you can spread out the costs of your purchases to make sure you save on taxes where you can. How is this possible? Since the business is still using the equipment or storage - or will in the future - and has not made full use of it yet, you can spread the cost of the assets over the period you use them.
You can build equity
One of the great things about buying your equipment is that it becomes an asset for your farm business. When you own equipment or invest in a service building, or even buy grain bins, they all add value to the business. This means you’re increasing your business equity or net worth. The more you own - whether it is land, machinery, equipment, crop, facilities, livestock - the higher the net worth of your business.
Buying can be a badge of honour
All the advantages of buying we’ve listed above talk about the financial benefits of buying, such as tax benefits. But buying has some intangible and emotional benefits too. For many farmers being able to buy their equipment (or meet other requirements) is a matter of pride. Buying implies that you are successful at your farming operations. It also signals that you know how to manage your finances well. While you shouldn’t be basing purchasing decisions on vanity, being able to buy what you need for your business can feel like a badge of honour. Of course, depending on your usage, leasing may actually be a smarter option than buying. Make sure to consider all your buy or lease options carefully. Which brings us to the next part...
Advantages of leasing
Leasing is like a paid form of borrowing. You lease what you need from a leasing institution for a set period of time. Some things you can lease include tractors, air seeders, sprayers, combines, grain bins, pole frame sheds and more. At the end of your lease period, you may even have the option to buy out your lease. That means, you can buy the items you have leased at the end of your term. Now let’s look at the advantages of leasing.
You can use what you need only when you need it
Leasing gives you the flexibility to use the equipment or storage you need only when you need it. This is an advantage as you don’t have to pay the full price for something you will only use occasionally.
You can turnover equipment regularly
Anything you buy will depreciate over time with wear and tear. Not only will it require more maintenance, but its material value will decrease as well. If you use a piece of equipment heavily, then it makes sense to lease and return the item. You can lease a new piece of equipment the next time around. If your equipment turnover rate is high, then leasing may be the way to go.
You can take advantage of warranty periods
Another advantage of leasing also associated with equipment use is the warranty and service offered on your leased item. When you lease something, it will usually be under warranty. This allows you to get dealership service if something goes wrong. This is extremely useful if you need to have your equipment up and running through the season. Beyond the warranty period, the service charges can be quite high. But within the warranty period, the service costs will be free or only a nominal amount. Leasing allows you to take advantage of the warranty.
As you can see, there are advantages to both leasing and buying. Ultimately, whether you lease or buy depends on your specific situation. You may even find that there is no one fixed solution. You may need to both buy and lease equipment and storage. So, how do you decide? Here are some questions you should ask yourself before you lease or buy.
What is the status of my operations?
Whether you buy or lease depends on the nature of your business operations. Are your operations stable with regular income and expense flows? Are you expanding? Are you downsizing? If your operations are stable or expanding, perhaps buying is the better choice. If your operation size is decreasing, leasing would be wiser. Take stock of your situation before you proceed.
What is my tax situation?
There’s a common misconception that leasing is a better choice because of tax-write offs. That is not true for all farm operations. As you may have noticed in the section above, buying also offers plenty of tax benefits. You should work closely with your accountant and advisory team members to choose the right option based on your needs and financial goals.
Do I need new equipment or equipment under warranty?
Perhaps you have production and labour needs that require cutting-edge equipment. Maybe you’re fine with using reliable but older technology. Similarly, you may find that your use is not so extensive that you need items to be under warranty. On the flip side, maybe you use equipment intensively and need them to be under warranty. Depending on your use, you can choose the right buy or lease options.
Is ownership important to me?
Another aspect to consider when deciding between buying or leasing is the matter of ownership. It may be a matter of pride to own your equipment. Or building equity may be a crucial goal for you. If ownership is important to you, then buying is the right choice.
What are my finance options?
Whether you choose to buy or lease, you have to consider if you have the means to do either. This is one of the most important factors to take into account. If you’re paying out of pocket, then you have to think about how much of your savings or profits you are willing to spend. If you are looking for financing, you have to shop around for suitable ag loans. You can get loans for buying or for your leasing expenses.
For example, some of the different kinds of agriculture loans at Innovation Federal Credit Union include:
- Loans to buy equipment
- Loans for farm improvement
- All in One Mortgage pre-approved revolving credit
With loans such as these, you can get great rates and repayment options, allowing you to ‘sow and reap' rich rewards.
We hope your decision to buy or lease has been made a little easier. We also hope you now know a little more about the financial outcomes of buying or leasing and your financing options. To learn more about agriculture loans and find the right one for you, please visit our Agriculture Loans page or speak with an agricultural advisor.