Agriculture Reference
In-Depth Information
Examples of operating leases are rental cars, trailers, moving trucks, etc. Agricultural
equipment can also be leased. This is particularly true for part-time producers who
operate small acreages and cannot afford to own general-purpose pieces of equipment, and
for producers who farm larger acreages and have equipment breakdowns or have been
delayed in planting, harvesting, etc. Also, specifi c-purpose types of equipment, whose
demand varies by region or by type of service, are popular items for operating lease
arrangements.
A
capital lease
is a long-term contractual arrangement in which the lessee acquires
control of an asset in return for rental payments to the lessor. The contract usually runs
for several years and cannot be cancelled. So the lessee acquires all the benefi ts, risks, and
costs of ownership, except price variations of the asset, but does not have to make the usual
investment of equity capital. It is comparable to a credit purchase that is fi nanced by a loan
with 100 percent fi nancing. However, it should be recognized that lease prepayments have
the same cash fl ow effects as down payments for credit purchases.
Leasing provides an opportunity for many agribusiness fi rms to extend their capital assets
without having to borrow. However, leasing is the equivalent of borrowing, because it takes
its place as a means of acquiring capital. Much of the money used in leasing comes from
fi nancial institutions and insurance companies. Special organizations have been set up to
lease a business almost anything. Doug Davies is seriously considering leasing trucks for his
business in order to conserve cash.
The typical lease, as would be expected, will cost more than the interest on a loan. The
lessor (person granting the lease) must charge an amount to return an adequate amount of
profi t for arranging the lease, a charge to cover an element of risk, interest on the capital
involved, and the depreciation on the item leased. The longer the lease period, the lower the
lease charges will be per period, which means that if Doug Davies leases a truck for four
years, he will pay a lower yearly rate than he would if he leases it for two years. In many
cases, the lessee (person renting the property) can arrange to purchase the property at the end
of the leasing period for a predetermined amount. The popularity of leasing has grown sig-
nifi cantly in recent years. Only ten years ago, this fi nancing arrangement was relegated to
business use only. Today, however, leasing is one of the most popular ways for individuals
to acquire the use of new and used automobiles.
Advantages and disadvantages of leasing
A business leases to avoid using its cash resources for purchasing assets. It will not have to
resort to borrowing or selling equity. Many agribusinesses take the position that their funds
should be used for expanding their operations rather than buying assets that can just as easily
be leased. Leasing is also a deductible expense, and, in some cases, may be cheaper than
borrowing, buying, and incurring the cost of depreciation. Another advantage is that leased
assets can be turned back to the lessor and newer or better assets procured. This is of special
value when change or new technology is pertinent to the asset. Today, for example, many
fi rms lease computer and copying equipment for a specifi c period of time, say three years,
and then turn the hardware in for new equipment. This allows fi rms to utilize up-to-date
technology at a reasonable cost. Also, leasing can be used to acquire access to very special-
ized equipment that would have a very low resale value if the agribusiness owned the equip-
ment and then decides to sell it and purchase new equipment.
But leasing is not without its drawbacks. For most businesses, leasing will cost more than
borrowing. Leasing also commits the business to certain payments, whereas if the asset were
