Freeing up working capital on equipment payments can make a big difference in a producer’s ability to cash flow their operation, especially during prolonged periods of tight profit margins.
“For many producers, net farm income is going to be down this year and because there is a lot of depreciation allowance available right now, maximizing tax deductions is not going to be as critical as freeing up working capital when it comes to financing machinery purchases,” says Iowa AgDirect territory manager Dan Takle.
As one of the leading equipment financing programs in the nation, AgDirect understands the economic pressures producers face. That’s why AgDirect offers creative financing options, such as purchase leasebacks, to help recapture working capital.
The purchase leaseback transaction process
Qualifying for an AgDirect purchase leaseback (PLB) is one of the quickest ways producers can increase liquidity, optimize cash flow and manage risk. Without interruption of use, the product allows customers to roll any new or used equipment they have previously acquired into a lease.
Whether the asset was paid for with cash or financed elsewhere, AgDirect will write a lease on the asset for the full equipment value and reimburse the cash to the producer, or pay off the current loan or lease, and apply any equity toward the first lease payment.
“AgDirect has been offering purchase leasebacks for more than a decade and they have increased in popularity over the years,” says Amy Weum, Farm Credit Leasing relationship manager. “As producers continue to get savvier about tax strategy and the benefits leasing can have on their operation, they see how valuable a purchase leaseback can be in enhancing their cash flow.”
Example: If a producer originally financed a combine for $500,000 with the intention to trade in three years when the asset is worth $300,000, their payments would be based on the full $500,000 over the course of the loan. However, with a three-year lease and a $300,000 residual, the producer’s payments would be significantly less because their payments would be based on the portion of the combine that is being used during that period - $200,000.
In this example, the annual lease payment on a three-year lease would be around $80,000 compared to an annual loan payment of $180,000 on a three-year loan. The lease frees up an additional $100,000 annually for the producer to use elsewhere in their operation.
“Rather than fully depreciating an asset in the first year with no deductions remaining for future years, a purchase leaseback sets a consistent annual write-off over the term of the lease which aids in long-term financial planning,” adds Weum. “Producers can also use a purchase leaseback to increase cash reserves, preserve Section 179 deductions and take advantage of low AgDirect lease rates.”
Other purchase leaseback considerations
Purchase leasebacks are offered on all assets typically leased by AgDirect regardless of when the equipment was originally acquired. However, if the asset was acquired in a prior calendar year and if depreciation has already been taken on the asset, Weum says AgDirect would recommend a conditional sale type of purchase leaseback.
According to Weum, the most popular conditional sale option is a Purchase Upon Termination (PUT) purchase leaseback.
“With this type, the producer maintains tax ownership of the asset and continues to depreciate the asset during the life of the PLB agreement. As a result, there is no gain recognized and the producer benefits from lower payments than with a loan because the lease has a balloon-like residual,” Weum explains.
“At the end of the lease, the producer has the option to either purchase the asset for the residual or they can trade it in at any time during the leasing period. This offers a great deal of flexibility along with rock-bottom, low payments,” Weum adds.
Looking for financing options to recapture your working capital? Consider a purchase leaseback with AgDirect. Producers should always consult with an accountant or another tax professional before entering into any lease agreement.
To learn more about AgDirect or locate your nearest AgDirect territory manager, contact the AgDirect financing team at 888-525-9805 or visit agdirect.com.