To get to the bottom of the age-old debate, we went to a few experts including Ed Knash, ATB’s VP Agricultural Centre of Expertise; David Hirch, ATB’s Managing Director, Agriculture Centre of Expertise, Business & Agriculture; and Stuart Person, Chartered Professional Accountant with MNP’s Agricultural Services.
The three experts came up with five things to consider as you decide whether to lease or buy:
1. Do you have the cash to make a down payment on a new piece of equipment?
Stuart Person suggests that "If the answer is no, then you’re looking at a lease. If the answer is yes—and you have the money for a down payment, which may be up to 25%—then you likely want to buy. "
“There are several ways you can buy,” says Hirch. “You can get financing via ATB through the dealer which means the dealership arranges for the funding and sends us the bill of sale. ATB offers both a loan or a lease option with normal down payment of 20% or even less depending on your credit rating.”
You could also go to your ATB branch and get a regular loan. “The difference would be when you walk into the branch and do the financing, it’s part of your overall financing package and it may take a little longer to arrange.”
As equipment costs keep going up—from about $300,000 a few years ago for a tractor or combine to about $700,000 today—many farmers are finding they can’t afford the down payments to buy and so they’re turning to leasing. ATB also offers a full range of leasing options both through dealerships and our branches.
“I look at leasing as something to be used for people who don’t have the capital required to actually own something,” says Person. “If you want to own a $600,000 combine you may need to have $150,000 for a down payment. A lot of people don’t have that kind of money. If you lease you don’t have to put anything down. You just start making payments.”
2. What about taxes? Does it make a difference to my taxes if I lease or buy?
The answer is yes, and no.
When you lease, 100 per cent of your payments are deductible over several years. But when you buy, you see tax advantages in the first few years after you make the purchase because you can depreciate the asset. “In the early years, you’re better off to buy and in the later years the lease catches up,” says Person. “After five or six years, it’s a wash for tax.”
3. Wait, what class of asset are we talking about? Do you need a new building or a tractor?
The type of asset you’re getting is an important factor in the equation. “If it’s a building or granary you may want to lease because you can write it off a lot quicker,” says Person. “But with motorized equipment for the farm you might want to try to buy.”
Using the declining balance method to calculate depreciation, the capital cost allowance or depreciation rate is 30% per year for motorized equipment and 10% per year for buildings (but don’t forget about the half-year rule of depreciation).
4. What’s the cost of borrowing for leasing vs buying?
Generally, leases are a little more expensive. But you have to look at the interest rates for leasing vs financing and do the math. “It’s important that customers evaluate the actual cost of each provider,” says Ed Knash.
And take a close look at any added fees for a lease agreement. “You think the lease may be at 4% interest but by the time you factor in any fees, additional charges and this and that, when you do the math it may be costing you more,” says Person. Make sure you understand the residual value of the lease—that is, what the buyout would be.
All of this leads to the fifth suggestion:
5. Always, always, always read the fine print.
It’s really important to read any lease agreement so that you fully understand your responsibilities. Terms and conditions vary widely from agreement to agreement. “Some people think ‘I’ll lease for five years and if I don’t want it anymore, I’ll just walk away,’” says Person. “But some leases have clauses that you can’t walk away and you have to buy it out.”
If you can’t make sense of the fine print, bring it to a financial advisor or lawyer to go through the agreement and make sure you’re aware of and understand the terms.
For more info, read Person’s analysis here: Lease vs Buy? and/or call your ATB advisor.