Leasing: A Smart Financial Tool for Today's Farmer

Posted by on 23 May 2016 | 0 Comments

For many years, farmers and ag businesses looked at leasing negatively or something only for businesses that were undercapitalized.  I too had this opinion of leasing in years past.  We have discovered over the past 5 years that there are leasing opportunities that reduce our risk and manage our annual expenses. An example that I want to share within our own business is with sales pickups.  We have 150 pickups in our fleet, and when we needed trucks in the past we would work with the local truck dealership to purchase what we needed, and we would write a check and then depreciate the truck out over 7 years.  We traditionally would drive these pickups until they had 200-250K miles on them, or until they were near salvage status.  As business systems improved, we began tracking our ownership, fuel, and maintenance cost on each pickup.  As we analyzed the total cost of ownership, we discovered that we could lease trucks for 100,000 miles, at a similar cost per mile to our current ownership strategy, and write this monthly expense off as an expense.  In this business environment where we are all striving to operate lean and do more with less, time is one of our most valuable assets.  Leasing these trucks, keeping them under warranty, and reducing downtime has proven to be the least cost approach for AgriVision Equipment.  I share this because an 8R tractor lease may do the same for you.

Why customers lease:

  • #1 Reason: Lowest payment – Leases frequently offer lower payments than loans because the lease residual due at the end is not included in the payment amortization.  The higher the residual, the lower the payment.
  • Technology: with technology changing rapidly, leasing equipment for 2-4 years, allows producers to update equipment on a planned replacement cycle.
  • Risk Management and Fixed Cost of Ownership: By keeping the equipment under warranty for 2-4 years, producers eliminate surprise repair costs and can count on a fixed annual expense.
  • Manage cash flow and preserve working capital.
  • Pay only for what you use, rather than the whole machine, preserving cash for expansion such as buying or renting additional acres.
  • Protect against rising interest rates over the next 2-4 years.
  • Off balance sheet financing does not affect leverage ratios.
  • Down payment: generally leases require a smaller up front payment
  • Estate planning: Does not enter your estate immediately, can be easily transferred at end of lease to a family member or partner.

Do you need to replenish working capital and reduce risk?

An example of some leases we have done recently: A customer owned a 2010 8295R that was originally financed on a 5 year note that he paid off in late 2015.  It had a trade value of $160,000.  He traded it in, and was able to get a new 8295R with 4 years of PowerGard warranty (no risk of major repairs) with one of the following options:

  • AVE purchase your tractor and write you a check for $160,000.  Lease new 8295R on a 3 year lease for 3 annual payments of $21,900/yr.
  • Receive check back for $126,428.  Lease new 8295R for 3 annual payments of $10,000/yr.
  • Receive check back for $96,428 and get the new 8295R for 3 years of use with no payments.
  • Finance trade difference of $100,000 for 5 years, 5 equal payments of $22,400.

MAY IS THE MONTH TO MAKE A MOVE

With growing used equipment inventories nationwide, lease residuals on 8R tractors are going up this month, causing payments to increase.  If you would like to discuss a lease on an 8R tractor, even if you don’t need the tractor until fall, May is the time to make it happen.  On June 1, the lease structures are changing and payments will increase.  The following example, shows the special AgriVision Equipment promotion we are offering in May, as well as the new published June lease structure.  These are the lowest lease payments you will see in years……….and possibly ever.  If you have a need to lease a tractor, do not miss this opportunity.  Program ends May 31st.  Lease paperwork must be signed by May 31st for inventory on hand or a signed purchase order will protect the program for delivery prior to November 1.