The husband thought for a moment and replied,
MACHINERY REPLACEMENT - LEASE OR BUY
Agriculture is recognised as one of the UK's more capital intensive industries. Land and buildings account for the vast
majority of this capital. However, investment in agricultural machinery has also increased in recent years. The total
value of machinery on UK farms has been estimated at £7.6 billion, by Defra. At that level the annual replacement cost
could be around £1.5 billion, depending on the average life of the machinery.
There are a number of ways which machinery investment can be funded. Some farmers may fund this sort of capital
expenditure from their own resources, however, many will need to borrow funds through a bank loan or overdraft or use
some other form of credit.
Leasing is a commonly used source of credit, through which machinery can be financed. In principal leasing is a form of
instalment credit, where a farmer enters into a contract with a leasing company like Lombard. The farmer has the use of
the machinery over a period of time, in return for the payment of rentals. However, the leasing company retains
ownership of the machine.
The decision to lease rather than purchase a machine, should consider the relative cost of borrowing and the cashflow
implications. It is important not only to consider interest rates, but also to check the size of the deposit required,
secondary rentals and the proportion of any sale proceeds refunded. The decision should also consider the profitability
of the business and its liability to income tax. The benefit of the machinery allowances accrue to the owner of the
machine, i.e. the leasing company. However, the farmer is allowed to claim the rental payments as a business expense.
A finance lease is divided into two parts, a primary period and a secondary period. During the primary period the
machine is effectively paid (but not purchased). The primary rentals reflect the capital cost of the equipment and the
interest charged. At the end of the primary period the lease can continue into a secondary period at a minimal cost, it
can be terminated or a new lease taken out.
Under an operating lease or contract hire agreement, the payments made also cover the maintenance and servicing
costs of the equipment. If the machine is sold at the end of the agreement, the farmer receives none of the sale
proceeds.
A lease purchase agreement offers the farmer an option to purchase the asset for a nominal sum once the final
instalment is paid.
For those who want to take ownership of the machinery immediately, a credit sale may be an option. The farmer
benefits from the tax advantages of machinery ownership and can also sell the machine at anytime subject to all the
instalments being paid off. Alternatively, a short-term business loan could be used .
There are many options available to finance the purchase of machinery today. It is not as simple as lease or buy.
Making comparisons and establishing the best deal can involve complex calculations, so before deciding on the best
way to finance a major investment in machinery, it's worth getting expert advice.
At NatWest we remain committed to the agricultural sector. We have over 100 specialist agricultural managers,
supported by their colleagues in Lombard asset finance who will be delighted to discuss your machinery finance
requirements.
Gareth Evans, Agricultural Relationship Manager
Mobile: 07500 814 062, Land line: 0151 242 1204
E mail: gareth.evans@lombard.co.uk
LOMBARD VOTED BEST LEASING
AND ASSET FINANCE PROVIDER 2009
BY BUSINESS MONEYFACTS
February 2010 Keep The Farmart coming free...... Tell’em where you saw’em, please PAGE 13
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