515-223-5119 info@ineda.com

Amid rising prices of both new and used equipment, many dealers are helping their customers leverage financing to spread out their machinery costs and reduce the financial burden of keeping their equipment up to date. But is purchasing the equipment outright with a loan or financing the use of the equipment with a lease the right option for your customers?

Here are 10 questions you can ask your customers to help them understand the key differences between conventional purchase plans and leasing agreements, and how each option can impact their cash flow, machinery costs and tax position.

1. How many hours a year do you expect to use the equipment?

Asking this question will help your customers determine whether owning or leasing the equipment is a better fit based on usage and residual value, or the estimated value of the machine at the end of its lease term or service life.

With a loan, customers finance the full cost of the equipment. With a lease on the other hand, the amount financed is the equipment cost minus the residual over the term they expect to use the equipment.

2. Are you looking for the lowest possible initial investment?

With a loan, the down payment due at the time of purchase can be upwards of 20 to 30 percent of the total cost. Whereas with a lease, only the first payment is due upfront in most cases.

The difference in upfront costs between a loan and lease can be substantial. If a customer is worried about their debt-to-income ratio or cash flow, then a lease might be the better option.

3. Do you have a trade, or will you be putting cash into the transaction?

Trading used equipment into the dealership can be advantageous for customers, especially when demand is high and the equipment is in good condition. Trade equity can help reduce the purchase price of the equipment being exchanged.

In some cases, the trade-in value will cover the down payment of the new loan. Alternatively, because leasing offers 100 percent financing, customers can use their trade equity or any cash saved from leasing toward other business expenses.

4. What’s your trade-in frequency? Do you typically buy new or “like-new” equipment?

If your customers trade equipment frequently, leasing can offer lower payments than a loan and allow them to acquire equipment without the long-term costs of equipment ownership. Leasing is a good option for keeping machinery under warranty and repairs and downtime to a minimum.

Additionally, leases can be structured with the flexibility to trade the equipment in for a newer model for no further obligation. By having access to the latest technology, your customers can avoid equipment obsolescence, improve efficiencies and potentially increase profits.

5. Are there other areas of your operation where you could be using operating capital?

While some customers have the financial stability to accept higher machinery ownership costs in the long term, equipment ownership also requires comparing those costs with the opportunity costs of not having the capital invested in other areas of their operation.

By only paying for a portion of the asset that is used rather than the full value, a lease can give customers the flexibility to free up working capital for other loans or purposes such as structure upgrades or land purchases.

6. How important is equipment ownership to you?

If your customers have the money for a down payment and the equipment they intend to buy will remain in their equipment line-up long term, then an equipment loan may be the way to go. With equipment ownership, customers add asset value to their balance sheet that can be used as collateral when making other purchases or taking out loans.

Machinery ownership gives customers full control of the equipment’s use and performance. Rather than being restricted by the terms of a leasing agreement, they have the freedom to replace, sell, or make any customizations to the equipment as needed.

7. How are financing rates and terms determined?

The interest rate charged on a loan is directly related to your customers’ credit worthiness. With a lease, lenders look at their borrowing history as well as the equipment in terms of how well it holds its value and its anticipated usage.

Financing structures vary by lender, but the typical period used to amortize debt is three to seven years on most equipment and up to 10 years on pivots. Longer terms typically have slightly higher interest rates than shorter terms; however, the flexibility longer terms offer often surpasses the extra interest paid.

8. What are your obligations with a loan versus a lease?

With an equipment loan, your customers will be fronted the capital to pay for the equipment and fully own the equipment once they’ve repaid the loan according to its terms, plus interest. Customers will also be responsible for all ownership and operating costs.

If your customers opt for an equipment lease, they won’t own the equipment outright, but they will be responsible for making the lease payments and all applicable operating costs such as maintenance, sales and property taxes, license, registration, and insurance.

9. What risks or limitations could you be overlooking?

By owning equipment, customers aren’t locked into any use limitations or early termination fees. With some leases, hour limits apply, in which case they will be responsible for any excess usage charges beyond the agreed-upon hour limits.

However, equipment ownership requires bearing the cost of depreciation resulting from wear, obsolescence and the age of a machine. With a lease, some of the risk of obsolescence falls upon the lessor along with future value risk.

10. What are the tax advantages?

On a loan, customers are entitled to depreciation benefits as owner of the equipment. A lease can go either way depending on if it is a true lease or a conditional sales lease.

With a true tax lease, customers can deduct their full lease rental payment as an operating expense rather than depreciating the asset. With a conditional sales lease, customers take depreciation just as they would with a loan while still benefiting from the flexible financing offered in a lease.

Before entering into a loan or lease agreement, it’s a good idea to advise customers to consult with their accountant or tax adviser to discuss their specific tax circumstances and cash flow requirements.

Learn more about equipment financing options by locating your nearest AgDirect territory manager or contacting the AgDirect financing team at 888.525.9805.