The advantage of both methods is that there is no need to mortgage your real estate or business, but instead, the machine itself serves as collateral. Thus, you can use the farm and related property as collateral for other financing.
Typically, hire purchase is used for the acquisition of farm machinery or livestock building equipment including, for example, tractors, harvesters or milking robots. The possession of the machine or equipment is transferred once the final instalment is paid. Usually, 70 per cent of the purchase price is financed.
One benefit of hire purchase financing is that it allows for normal depreciations in accounting, immediate deduction of the value added tax and the utilization of cash purchase benefits. Additionally, the financed machine can be either new or second-hand, or it can be imported from abroad. It is also possible to receive investment support for the object of financing.
All you need to do is to agree on the purchase terms and conditions with the seller. You can ask the commercial enterprise selling the product to make a financing offer on your behalf. Hire purchase financing is a smooth and flexible process since OP collaborates with all major machine and equipment vendors.
Leasing refers to the long-term rental of machinery and equipment. OP purchases the lease object from the vendor of your choice and then rents it to you on a leasing agreement. After the lease period, the machine remains in OP’s possession and OP will find a new owner for it. The leasing agreement may also be extended.
In the leasing agreement, a residual value is determined for the machine, which corresponds to the machine’s value upon the termination of the lease period. According to the agreement, the residual value is the liability of the lessee, vendor or a third party.
Benefits of leasing financing:
- One’s own capital is not tied up.
- Securities are not tied up, the lease object serves as collateral.
- The rent is deductible in income taxation, and the VAT share of the rent in VAT taxation.
- The lease period and residual value can be optimized according to the estimated economic usage of the lease object.
- The predictability of the lease amount makes it easier to estimate the return on the investment.
- Leasing facilitates the farm’s liquidity and cost allocation.
- Management of production-related property is more flexible, as financing is available for acquisitions when needed and as required.
- Leasing contributes to a more versatile financing structure.