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Equipment question: Lease or buy?

Willie Vogt Soybean harvest
EQUIPMENT CHOICE: Often farmers ponder lease vs. buy when it comes to equipment, but perhaps that’s not the first step. Considering your financial team and how you work together can help take complexity out of purchase questions.
It turns out the question is a little more complicated, and farmers need to rely on their financial partners.

Mark Gray doesn’t talk like your average banker. A conversation with this vice president of First Interstate Bank, who is based in Pasco, Wash., may start with a simple question but expand quickly into some key issues farmers should be considering for their operation. First Interstate Bank mainly serves the West, but Gray’s insights have relevance to farmers across the country.

Farm Progress asks Gray to explore one question: Should farmers lease or buy new equipment? For Gray, and likely your own operation, that question is far more complicated than you think.

“I will tell you everybody’s circumstances are a little different, and as those expand and contract, the answer can change,” Gray says. “The No. 1 thing to do is make sure you have a good financial team.”

Gray challenges readers to ask themselves the last time they talked to either their banker or their accountant. He acknowledges that the answer will likely be “once a year,” and he adds that this infrequent communication leaves opportunity on the table.

“A lot of times, a farmer is looking to expand or contract, and you have to ask what approach best benefits that goal,” Gray says. “Many think the banker is out there to sell them something. But a banker on your team is there to look after your fiduciary success.”

Using right tools

He shares the analogy of the toolbox, which on the farm has seen little change over the last few decades. The same is true in banking, but the key is to develop and expand the operation picking the right tools to maximize returns and farm equity.

The hemp craze a couple years ago is an example Gray cites. “This was a huge thing a couple years ago, we were all going to plant hemp, and we were going to change the world,” he says. “Farmers purchased all sorts of equipment, including hemp dryers. Most of those dryers and harvesters are mothballed in a shop somewhere and not being used.”

“Good communication with your banker would have offered insight into the right choice for acquiring that equipment,” he says. “Lease that equipment until you understand the market. A good conversation with your accountant and banker can help.”

Gray shares that there are tools farmers can use to finance equipment as needed with terms of three, five or 10 years. “Some will argue that equipment will not last that long.” But if “spending $500,000 for a tractor, it should last for quite some time if well maintained. Everyone’s circumstances are a little different,” he says.

Your banker offers tools like leasing or term financing that can be compared to that crescent wrench or pliers in your toolbox.

Don’t finance on a whim

These days when margins may be tight, but income supports adding equipment, a conversation with your banker and accountant can help better manage the equity you’re building in your operation.

Farmers are smart investors, often appearing to buy equipment on a whim. Gray explains that while it may not be on a whim, they could spend a few minutes on the phone with their financial team to make sure the finance choices make sense.

“We want our customers to be successful, because when you’re successful, we are too,” he says. “Equipment is a tool to get to that success if it is managed and maintained properly.”

However, if your only conversation with the bank is getting your operating loan once a year, Gray says you’re missing opportunities to better manage cash, debt and equity.

“I grew up farming, and my dad was the worst at talking to his banker,” Gray recalls. “He would tell the banker to fix problems like an order taker. Bankers are not order takers.  They are part of the team and have a fiduciary responsibility to help you achieve your goals.”

Gray says he would like to talk to his clients weekly but communicates with them as much as possible. Those regular calls and connections can help your financial team better understand your farm’s goals and objectives. “This is a team discussion, but the producer will sometimes say that they’re being challenged,” he says.

For a farmer, being told by a banker not to buy something isn’t a fruitful conversation. However, regular communication can change that discussion to consultive where the banker may say, “Is the 300-hp tractor right at this time, or would a 200-hp tractor that’s $100,000 cheaper work?”

Concludes Gray: “We think farmers are brilliant. They’re in business and we’re not. They hold the risk, but we want to help them understand what they don’t know. These are the questions they haven’t asked themselves, or are unwilling to ask themselves.”

 

TAGS: Finance
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