As in most modern businesses, successful farming requires management of both time and resources, with the added challenge of unpredictable weather. The best equipment and technology can help mitigate risk in Canada’s short growing seasons, and leasing allows farmers to replace and upgrade their equipment without a large capital outlay.
“Leasing can help ag producers secure the equipment and technology they need,” says Ryan Riese, National Director, Agriculture for RBC Royal Bank. “To help them make the decision that works best for their farm and their business, it’s important that producers understand how equipment leasing works, the benefits it may offer, and the many options available to them.”
“A lease line of credit is often ideal for when you need the flexibility to manage multiple equipment leases, or to act on equipment needs and opportunities quickly.”
Ryan Riese, National Director, Agriculture, RBC
Financing growth and expansion can be especially challenging for replacing and upgrading pricey farm equipment. Leasing can often provide better cash flow and preservation of capital for more strategic business initiatives, and it should be a key consideration in overall business planning. Leasing can be an efficient and effective way to manage growth and plan for the replacement of existing equipment while preserving capital for operating and input costs.
Leasing can also free up cash for other growth opportunities. When deciding whether to lease or purchase equipment, there are several things to consider. They include the useful life of the asset, whether the equipment will need to be routinely replaced to remain efficient and viable, the importance of new equipment for increasing efficiency, business capacity and productivity, and if it is possible to make better use of working capital and realize tax advantages by leasing.
“The answers to these questions will help ag producers weigh the possible long-term benefits of the available options,” says Riese. “A conversation with an equipment-financing professional can further help farmers better understand the implications of some of these questions and answers.”
Understanding the market
Additionally, leasing offers flexibility, with several leasing options available. Business owners can choose fixed or variable interest rates, and the lease terms can be structured to fit cash flow needs, both now and in the future. When choosing between a variable or fixed rate, each farmer should consider their unique financial position and risk tolerance.
“One way to gauge your level of risk tolerance is to take the ‘how can I sleep at night’ test,” says Riese. “For some producers, a locked-in rate and predictable monthly payments may provide the peace of mind they need to plan for the future and to keep their debt feeling manageable. On the other hand, others may be more comfortable with a higher level of exposure to fluctuating interest rates.”
In addition to assessing their level of risk tolerance, farmers will also want to evaluate their financial position. Generally speaking, the more highly leveraged their business, the more vulnerable they are to changes in rate.
“Farmers should get acquainted with the interest rate markets to stay attuned to the general expectations of future rates,” says Riese. “Are they expected to increase, decrease, or remain somewhat stable? While no one has a crystal ball to accurately predict rates, knowing the general expectations can help you balance different factors and make more informed decisions. This is particularly important during turbulent times such as we see today.”
When faced with a rising interest rate environment, one strategy that owner-operators can consider to minimize their exposure is to use a combination of fixed and floating rate. This allows producers to have some of their core debt amount at a fixed maturity, meaning they’ve guaranteed fixed rate for a period of time in the future. Producers can then take a look at the maturity date of the debt and aim to stagger them.
For example, they might have a portion of debt that has to be renewed in 2 years, 4 years or 5 years in what could be either a higher or lower interest rate environment. This approach – termed laddering the risk – allows producers to diversify and spread out their risk.
Different tools for different farmers
Depending on individual goals and circumstances, leases can be structured in many ways, offering flexibility to meet unique business owner needs. In many cases, leases can be designed so that the asset is leased for a set term and the asset can be purchased for a predetermined amount at the end. Alternatively, farmers can lease an asset for a set term and then have the option at the end to return it to the lease finance provider.
Another tool farmers can consider is a lease line of credit, which is a flexible loan that consists of a defined amount of money that can be used and reused as needed to finance equipment. Offering ongoing access to funds, this solution allows ag producers to have their financing approved and in place before it’s time to acquire new equipment. In addition, with a lease line of credit you need only apply once to line up all your anticipated equipment financing for the year.
“Lease lines of credit may make managing multiple leases with varying terms easier for business owners,” says Riese. “A lease line of credit is often ideal for when you need the flexibility to manage multiple equipment leases, or to act on equipment purchase needs and opportunities quickly. We encourage growers to reach out to an RBC Agricultural Account Manager who can help them explore the various available lease types and options, and determine the solutions that work best for them.”
For those concerned about their ownership rights, it’s important to talk to a leasing agent to understand their individual lease agreement. However, with most equipment leases, the lessee would be responsible for maintaining and insuring the equipment in the same manner as an owner, with a variety of ownership options available at the end of the term.
Lease direct at the dealer
RCAP Leasing is a wholly owned subsidiary of RBC, with a long-held reputation for efficient lease processing due to the expertise of its credit professionals and its back-end technology platform. Their team has been meeting the equipment financing needs of their vendor and broker partners since 1967 and has a long-standing tradition of empowering the growth and productivity of Canadian business. RCAP offers leasing options in the dealership as a one-stop shop, allowing producers the ability to make the payment/financing structure part of their buying decision and creating an easy, streamlined leasing experience.
RBC’s leasing offerings allow clients to obtain approved funding that they can then use to lease equipment at a dealer of their choice. This approach often scales better for larger operations with more complex leasing needs, but requires the customer to manage the process with RBC and the process with the equipment dealership somewhat separately.
“If you are considering an equipment decision, our Agricultural Account Managers are here to discuss your needs and help you to understand which offering makes best sense for your operation,” says Riese. “They can also share advice and insights on how leasing fits into your broader agribusiness management plan, and also provide resources and financing solutions to help you manage and grow your farm operation.”
RBC has serviced Canada’s agriculture sector for more than 150 years and remains committed to supporting Canada’s producers with financing and banking solutions needed to manage, innovate and grow their operations. Every farm operation is unique and RBC’s flexible terms and payment schedules allow farmers to customize their lease to suit their business needs.
To learn more, speak with an RBC Agriculture Account Manager for tailored advice, resources and financing solutions to help you manage and grow your farm operation. For more information, visit rbc.com/agriculture
