A Farm Credit lease: Quick. Convenient. Cost Effective.

Thriving businesses generally observe a few time-tested axioms: Work hard. Follow a business plan. Keep your records up to date. Take care of your employees. Treat your customers well.

And in recent years, scores of successful ag businesses have added another item to the list: Lease your equipment. Leasing offers a number of advantages over purchasing, whether you're talking about tractors, skidders, balers, harvesters, transplanters — even entire buildings complete with milking parlors! A lease allows you to save money on taxes, eliminate "lost capital" worries, and free up down payment money for other business purposes.

Also, when you lease with Farm Credit, you enjoy the convenience of creative and flexible payment options that match seasonal business cycles — plus you can take advantage of Farm Credit's complete portfolio of ag business services.


M-B Farms, LeRoy N.Y.

Just ask Ken Mattingly, who owns and operates M-B Farms, Inc. Ken manages a 1,700-acre vegetable operation (he owns half the land and rents the other half). This year's crop mix featured 900 acres of sweet corn, 300 acres of peas, 200 acres of dry beans, 100 acres of snap beans and 40 acres of beets. The balance went to field corn.

With all of this acreage and crop diversity, Ken and his employees operate a lot of equipment to keep things running smoothly, especially at harvest time. To help meet productivity demands — and to ease the burden on the bottom line — Ken often prefers leasing his equipment instead of buying it.

"Right now equipment leasing is good for my business," Ken says. "But I want to emphasize that leasing is also an individual decision. It may not be right for someone else, and there may be a time when it is not the right choice for me. Today, leasing makes the most sense for my bottom line."


Golden rules

Ken has adopted his own set of "golden rules" regarding equipment leases.

"Number one," he says, "lease it if it has no resale value. Highly specialized harvesting equipment has almost no resale value in our area. A lease forces me to pay for equipment over a short period of time with the cash flow generated during the years that I run the equipment."

Ken adds, "Equipment is basically lost capital, and it makes sense to reap its value from its use instead of from a resale that may not happen anyway."

Ken's second golden rule relates to tax savings. "Leasing helps to protect my personal income. With a three-year lease, I can deduct my entire lease payment immediately. With a loan, I have to deal with seven years of depreciation and interest expenses. Also, a faster write-off means larger deductions each year, reduced taxable income and decreased tax expenses."

Next comes flexibility. Ken makes annual payments on his current Farm Credit leases for two harvesters. "The annual payment option provides me with the most flexibility," he says. "I bought the two harvesters on March 31, the last day of my fiscal year. This annual payment date allows me to choose the year in which I want to make each subsequent payment. I can pay on March 31 or use a 15-day float period to pay for it in the following fiscal year, depending on my tax situation for the filing year."

The final rule relates to cash retention. "A lease can keep money in my business. With today's low grain prices, farm operations have to maintain a solid working capital position in their business. Leasing can help a business do this because leases don't extract cash from the business with a big down payment. You can get your new equipment without deteriorating your capital position."


M-B Farms and Pro-Fac

M-B Farms ships most of its produce to Pro-Fac, a fruit and vegetable processing and marketing cooperative. Pro-Fac sets the number of acres M-B will plant, the estimated commercial market value and the average price they pay per unit.

With this arrangement, Ken can accurately forecast gross sales on the contracted crops. This allows him to assume a degree of financial risk by selling his dry beans and field corn on the open market to the highest bidders. Customers for these crops include a local processing company (beans), dairy farmers (corn), Agway stores or a feed mill.

Ken and his employees also run another enterprise that accounts for a large part of M-B Farms' total revenue. This is a custom harvesting operation that Ken runs for Pro-Fac.

With harvesting equipment becoming ever more sophisticated and impossibly expensive for many farmers, it made sense for Pro-Fac to contract with a limited number of independent harvesting operations rather than requiring individual farmers to harvest their own crops. This arrangement guarantees Pro-Fac a certain level of quality and guarantees harvesters a specific allowance for harvesting. Under the arrangement, Ken's crews and equipment harvest sweet corn and peas for other farmers and ship the crops to Pro-Fac for processing.


The Farm Credit partnership

Leasing isn't the only service M-B Farms obtains from Farm Credit. Tax planning is another.

"I went to Farm Credit to us to discuss my tax situation," Ken said, "and I was looking for ideas on how I could create about $200,000 worth of expenses before year end to reduce my taxable position. After leasing, which was the logical first step, I still needed to show additional expenses."

The solution? A $50,000 Farm Credit loan to prepay his crop expenses, Ken continued, "I deferred receiving payment from a broker and then we front-loaded the lease so I could make a larger payment during the filing year. My accountant reviewed and supported the proposal. Farm Credit made sure I ended up with an efficient and comfortable tax plan."

That wasn't all. Farm Credit set up a $450,000 lease line of credit for me, which provided additional flexibility for my business.

"The line of credit gives me a range to work with," says Ken, "plus the opportunity to lease equipment as I need to throughout the year. The line is larger than I needed, but it is very convenient and easy to do." At the end of the lease, Ken will have the opportunity to purchase the harvesters. "Their useful life is longer than three years, so we can run them beyond the lease time."

Says Ken, "Other banks have approached me, but I stay with Farm Credit because they have stayed with me during more difficult times. Also, my loan officer understands my business and how it operates. I don't have to struggle to explain issues to him, like the weather and the hardships it brings. I see him a couple of times a year, and all our other business is done right over the phone. I like doing business that way."

Ken added an important footnote to his discussion about the success of M-B Farms. "I owe a lot to my employees," he emphasized. "I feel comfortable leaving the business in their hands when I am away. I can be away for three or four days at a time, and they do an exceptional job of keeping the business running smoothly."

Contact us at info@farmcreditmaine.com for more information about our equipment financing options.

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