Farm machinery can be financed in several different ways. If you have sufficient cash available from your own reserves, you may not need to apply for finance. Otherwise, it is likely you will need an overdraft, loan, hire purchase or lease finance agreement. Before selecting any of these options, it’s important to understand not just the interest and terms of the arrangement you are entering into but also the tax implications. This will help you avoid expensive mistakes. If in doubt, ask your accountant for advice.
Hire Purchase and Lease Finance Agreements
The most common farm machinery financing methods are hire purchase and lease finance agreements. Hire purchase tends to suit situations where the machinery is relatively inexpensive and can be paid off within a short time period.
When you enter into a hire purchase agreement, you agree to make monthly repayments for the duration of the agreement. Usually, an up-front deposit is required but security is not necessary as the asset itself satisfies the security requirement. The asset is registered in your name and you get possession as soon as the HP agreement is signed however ownership only passes to you when all repayments have been made. The interest rate on your loan is fixed so your monthly repayment remains the same for the duration of the loan. However, each year, you pay interest on the entire sum borrowed (‘simple interest’). While this can make the interest rate appear low, the APR (annual percentage rate) will be much higher. If you wish to terminate a hire purchase agreement, you can do so by notifying the finance provider but termination fees can be costly
For large, expensive assets or machinery that you want to finance over a longer time period, lease financing is usually more appropriate. In a lease agreement, you (the lessee) enter into an arrangement to use the machinery or asset for a period of time. Ownership remains with the lessor.
Table: Key Differences between Hire Purchase and Lease Financing
|Hire Purchase||Lease Financing|
Ownership of Asset
Hirer can purchase the asset when the last instalment is paid.
While the lessee has the right to use the equipment, ownership lies with the lessor. At the end of the lease agreement, the lessee can opt to continue with a secondary lease or buy out the asset.
Cover principal and interest on the loan for the term of the agreement.
Cover the cost of the asset.
Suits shorter duration and cheaper assets.
Suits longer duration for bigger assets.
Hirer claims the depreciation on the asset as an expense.Interest or finance may qualify as a business expense however, it must be distributed over the term of the agreement (i.e, it cannot be claimed up front).
While capital allowances are not available to the lessee, lease payments can be claimed as an expense. The entire cost is written off over the primary term of the lease.
VAT is calculated at the start of the repayment term.
VAT is payable on each lease payment.
Disposal of Assets
Where items financed on hire purchase are traded in for an amount that represents a profit for tax purposes, this profit can be rolled over on to the replacement item.
There is no tax concession on disposals of leased items where a profit has been made.
Deposits usually required up front.
Deposits usually not required.
Repossession of Lease / Hire Purchase machinery
In a hire purchase agreement, if you have repaid more than a third of the purchase price, the lender will need to obtain a court order to repossess the asset. The total hire purchase price includes any deposit you have paid as well as the instalments due under the agreement.
In the case of a lease agreement, the machine/car can be seized at any time during the course of the agreement if you miss your payments, however the lender must first warn you of this in writing.
Other farm machinery options
Depending on your requirement, contract hire or outsourcing might be more cost-effective than financing.
In a contract hire agreement, you pay a contract hire charge for machinery owned by the hire company. You also pay for the fuel you use but the hire company is responsible for all other costs such as servicing, repairs, and depreciation. This removes the burden of servicing your own machine and frees you to use your time and skills elsewhere, however, you do not own the machine.
Outsourcing can work well where jobs such as hedge cutting or spreading slurry require special machinery. However, while it can be a labour-saving and cost effective solution, contractors cannot be in two places at once so you need to think carefully when planning to outsource time-sensitive activities.
Your Credit Rating
Unless you have cash reserves, it’s likely that you will either need to apply for a loan enter into a Hire Purchase or Lease Finance agreement to finance your farm machinery.
If your application is for €2,000 or more, lenders are obliged to check your credit rating. This is done by obtaining a report from a credit rating agency. Lenders also have the right to obtain a credit report if you:
Apply for a loan of less than €2,000
Request restructuring of an existing loan
Have arrears on an existing loan
Breach the limit on a credit card or overdraft
Usually, the report will come from the Central Credit Register operated by the Central Bank of Ireland under the Credit Reporting Act 2013. This register stores personal and credit information on loans of €500 or more. The report will contain an overview of your full credit history. It will show lenders if you have failed to pay back any of your debts in full and if you have been slow with repayments. It lists loans you have applied for, highlights any failure to clear a loan and provides details of loans that were settled for less than you owed. It also reveals any legal action taken against you by lenders. You have a right to request your credit report, free of charge at any time from www.centralcreditregister.ie
If you are planning to purchase used machinery, it is important to verify that the person selling the machinery is the actual owner and that there are no borrowings secured on the vehicle. The status of finance on second-hand vehicles can be verified by contacting Hire Purchase Information Ltd, ICB House, Newstead, Clonskeagh Road, Dublin 14. Tel: 01 260 0905. Websites such as cartel.ie and motorcheck.ie also allow you to check the registration of a vehicle.
When financed efficiently, farm machinery should improve profitability by enabling you to save on labour costs and streamline production but purchasing the wrong machinery, or financing machinery inefficiently, can be an expensive mistake. As with any significant expenditure, the key is to do your homework and seek advice from your accountant before making your financing decision.
For the original article visit the Irish Farmers Journal.