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Having the right equipment makes an enormous impact on your operation, but getting that machinery often represents a significant cost in your budget. In this post, we’ll cover both the advantages and disadvantages of leasing vs. buying farm equipment.
When a farmer leases equipment, they enter a contract that allows them to borrow the specified equipment for an agreed upon amount of time. Leasing can be a strategic choice under the right conditions.
Leasing is right for you if you want to:
Even though you are responsible for the maintenance and repair of the equipment for the duration of the lease, you are less likely to have to spend as much on repairs when you lease new or gently used equipment than when you own equipment for its entire lifetime. Since 2020, the cost of labor and parts for ag equipment rose 41%, making the cost of keeping older equipment in top condition sometimes prohibitively expensive. Leasing a new piece of equipment every two to three years may help you reduce your repair budget.
Because cash flow can change according to the season and carries risk associated with weather patterns, pest conditions, and market volatility, farmers managing lower cash flow may prefer to keep fixed costs flexible. A typical lease lasts 24–36 months, making an ag equipment lease advantageous if you prefer not to be locked into a long-term contract like an equipment loan.
Assess your cash flow analysis using the guided calculation in the free Balance Sheet Template from FBN® Finance.
From seed-spreading drones to fruit-picking robots, the latest AgTech innovations are making farming more efficient than ever. At the rate at which AgTech is growing and evolving, it may be difficult to choose which, if any, of these innovations is most beneficial to your operation. Leasing allows you to test out different types of equipment on your farm before committing to a purchase.
Leasing has become increasingly popular, but there are several practical reasons why you may not want to choose this option, including:
Depending on your lease agreement, you may encounter restrictions related to the number of miles or hours you can use the machinery in a given time period. Going over that number will result in a higher payment. If you discover the equipment isn’t right for you or if you have a change in finances, you may not be able to terminate the lease early without a penalty fee.
You are generally on the hook to fix equipment parts that break during the duration of your lease. However, even if the machinery requires a new part, you cannot customize the equipment. As a result, it may not fully suit your specific needs and preferences.
Your debt-to-asset ratio may be less advantageous when you lease. Although leasing can save you money in the short-term, you do not earn the benefit of equity in the long term. Executive director of the Nebraska Farm Business Inc. Tina Barrett warned: “a true lease will not have an equal payment as the buyout, there won’t be a stated interest rate, and you won’t gain any equity in the asset.”
There are significant advantages to owning your own farm equipment, including:
While the latest AgTech comes with a hefty price tag, it’s worth doing a few calculations to see if it may actually be less expensive in the long run to own than to borrow. With an equipment loan, you will not need to pay for the entire cost upfront, and the interest associated with a loan may be less over time than the cost of leasing. Rates and terms for loans and leases vary and may fluctuate based on market conditions, so do your homework to see which is more economical for you.
When you commit to a new piece of equipment, over time you will learn how to recognize the causes behind certain noises it may make, how to manage its quirks, and its optimal settings. Your familiarity with the equipment could potentially save you downtime, as you’ll be more acutely aware when your machine is running a little differently than usual and needs to cool down or be serviced before it completely breaks down and, vice versa, when you can push it a little further than the gauges might suggest.
Every time you purchase new equipment, you need to study the owner’s manual and train your employees on how to correctly and safely use it. This is particularly true when you lease the latest AgTech that requires specialized knowledge. However, when you own your own equipment, your training will be reduced to new employees and standard staff safety protocols.
You’re likely an innovator, often trying new farming approaches and adapting on the go. It’s only natural that you would want to have control to customize your machinery so it best suits your unique needs. When you own your own equipment, you’re in the driver’s seat when it comes to upgrades and add-ons.
Owning your own equipment is not essential to turning a profit, and, in fact, purchasing may be a disadvantage for the following reasons:
Loans can help make the purchase of ag equipment possible more quickly than what it would take to save enough to purchase the equipment in full. However, some lenders require a down payment of up to 20% on ag equipment loans, which means you may still need tens of thousands of dollars on hand to purchase equipment even with a loan. When cash is tight, owning an asset may be less important than purchasing seed and chem.
On average, ag equipment lasts for about a decade, and while this can be a solid investment for standard machinery, it’s important to consider that technology is rapidly advancing. If you are trying to compete in the ag market, you may prefer the flexibility of being able to switch to newer, more efficient models more frequently than the life of your machinery.
Much like a car, farm equipment loses value the minute it rolls off the lot, and after only 500 hours, it’s no longer going to run like a new piece of equipment.
While you could sell your equipment to finance a newer model, you will not be able to fully recoup your costs and, if your machine is particularly outdated or dilapidated, you may not be able to offload the depreciating piece of equipment.
The decision to lease vs. buy ag equipment comes down to your needs and priorities. When choosing which is right for your ag operation, ask yourself:
Do you want to keep your fixed costs flexible and test out the latest technology? Then leasing may be right for you.
Do you know exactly what equipment you want to use for the next three years or more? Then purchasing may be right for you.
No matter which approach you take, we’re here to help your operation grow with flexible financing solutions on most ag-related products, including equipment loans. Farm equipment loans can help you buy the equipment you need to improve efficiency in your operation — without putting a strain on current budget or cash flow.
FBN Finance is a trusted provider of agricultural financing solutions, including farm equipment loans. We have a team of experts with years of experience in the industry, and we understand the unique needs of farmers. Connect with an FBN Finance loan advisor today to get a customized quote for your operation.
Use the form at the bottom of this page to learn more about farm equipment loans from FBN Finance.
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Financing offered by FBN Finance, LLC and its lending partners. Available where FBN Finance, LLC is licensed. Terms and conditions apply. To qualify, a borrower must be a member of Farmer’s Business Network, Inc. and meet all underwriting requirements. Interest rates and fees will vary depending on your individual situation. Not all applicants will qualify. NMLS ID: 1631119