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Loan or Lease?

It all depends on available cash, your tax situation and long-term business objectives.

Every day, farmers wrestle with the same decision when it's time to acquire new equipment on credit: Should I borrow or lease?

Each option has its own set of advantages, and what your neighbor does may not be the right choice for you. In fact, what you did last year may not make good business sense this time around.

There are also two types of leases - Operating Leases and Capital Leases. The characteristics of a Capital Lease fall somewhere between a loan and an operating lease.

Your decision depends upon several factors, including business goals, current cash flow, tax objectives and negotiating leverage. Whatever your choice, you can get help from Western AgCredit. We provide a broad range of loan options, and we offer convenient leasing services.

Loan vs. Lease Decision:

Loan Operating Lease
You must make regularly scheduled payments - balance plus interest - over the life of the loan, normally from four to seven years. You enjoy exclusive use of equipment over a portion of its useful life. Leasing assumes that you generate profits from the use of equipment, not its ownership. At the end of the term, you can renew the lease with payments based on the equipment's current value, buy the equipment or return it to the leasing company.
Advantages
  • Cost-effective. The biggest advantage of a loan is that it is usually less expensive, especially when interest rates are low.
  • Convenient. Especially for businesses with established lines of credit and strong relationships with their lenders.
  • Flexible. You can choose a fixed or variable rate, and loan contracts often allow you to trade or sell the equipment at any time.
  • No down payment. (Although first payment is due in advance.) Payments are calculated to cover the diminishing value of equipment over time, not the full acquisition cost.
  • Enhanced cash position. A lease frees up capital and keeps existing lines of credit open for other purposes.
  • Tax benefits. Payments are generally 100% tax deductible on income taxes for the life of the lease. In some cases, this allows faster write-offs compared with depreciation calculations over the life of purchased equipment.
  • Fleet purchase discounts. The leasing company may have negotiated a fleet purchase program with the manufacturer that results in a lower acquisition cost. Western AgCredit has a Truck Leasing Program that may allow you to benefit from the fleet discounts.
Disadvantages
  • Loss of cash. Once a business surrenders cash for a down payment, it's no longer available for other purchases or emergencies.
  • Risk. You may be reluctant to incur additional debt and may not want to risk losing the assets pledged to secure the loan.
  • Cost. A lease typically costs more over time compared to cumulative loan payments. However, this must be weighed against the expenses of the entire operation - availability of ready cash or tax advantages may be higher priorities.

Should I borrow or lease?

The best way to find out if a loan or lease is right for your business is to call or meet with your local Western AgCredit loan officer. He or she will review your business goals and your cash flow situation and suggest the most appropriate course of action to obtain the equipment that you want. Western AgCredit recommends that you consult with your tax advisor to determine the tax consequences of the various options available to you.

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