26 December 1997


You know all about

tractors, sure, but maybe

youre not so confident

when it comes to arranging

the money. Youre a

farmer, not a financier,

after all. But borrowing on

the right terms is vital.

Tim Relf reports

MOST of us cant remember the days when Shire horses worked the land.

Nowadays machinery is the backbone of agriculture – and, just as it dominates the land, so it dominates farm accounts, usually as the biggest single cost item.

According to Robin Arnold head of agricutural affairs at Highland Finance, the annual spend on agricultural assets in this country is between £1.8bn and £2bn. And with about 80% of all tractors and combines subject to a finance agreement, its vital that the terms of such a deal are right.

"There can be a daunting array of options," says Mr Arnold. "But by following a few simple guidelines, farmers can make sure they choose the most suitable one."

Repayment terms are vital – and a key consideration here is the length of the agreement. Most on the Highland book are between two and five years, with 36-months the most common.

"The ideal will depend partly on the working life and replacement cycle of the asset. A milking parlour, for example, would tend to be repaid over a longer period than a forage harvester."

The ideal term will also depend on the businesss liquidity. If theres "cash under the bed", it may be better to pay sooner, rather than later.

"Its increasingly likely that capital is stretched, however, in which case its important to avoid tying up too much liquidity in the investment.

"Sometimes it can be better to go for a 5% or 6% interest rate over, say, five years, rather than opt for the one-year interest-free package."

Farmers have tended to go "short" in recent years, says Mr Arnold. So there could now be some rescheduling in the coming months as lower incomes hit the industry.

"You should try and get the term right from the start. Going too short – and having to extend the agreement later, or vice versa, will involve an additional charge."

Linked to this will be the repayment intervals. This is where agriculture is unique. "Farmers have different cash-flows to the factory which produces widgets one day and gets paid straight away."

In the arable sector, where there can be a 12-month delay between expenditure and returns, its usual to buy a combine in the autumn, trading the old one in as a deposit. The first repayment is made a year later, after the next harvest.

For a dairy producer, however, monthly repayments – in-line with the arrival of the milk cheques – would be more suitable.

"Both sectors will change their approach to spending over the year ahead, as lower incomes take their toll. Replacement cycles will be lengthened, as the make-do-and-mend approach spreads."

And as farmers spend less on kit, so more emphasis will be placed on the basics, rather than the luxuries. "People will economise on the extras and the gimmicks – the bells and whistles which, together with the recent trend to seek more power, have seen the machinery spend rise at a higher rate than overall inflation."

As a result, the spend on assets will shrink this year. The penetration of finance companies could increase, however, as cash-strapped farmers look more to outside finance.

And purchasing, rather than leasing, kit will remain dominant, says Mr Arnold. Now about 95% is bought, compared with about a quarter in the mid-1980s.

Buying gives full ownership of the asset and, therefore, means the owner has the benefit of any resale value. With contract hiring – typically available for combines, tractors and materials handlers – the farmer never has ownership and returns the asset at the end of the agreement.

Treatment for VAT purposes is also different. If a machine is bought, the owner pays – and reclaims it – at the start of the contract. In rental agreements, the hirer pays and reclaims it on rental payments as and when they are made.

Opting to buy allows the owner to claim a capital writing-down allowance against tax, with a 50% first-year allowance in the first year. Available for small- and medium-sized businesses, this was introduced in the last budget. Previously it was 25%.

"But this concession could end at Jul 1, 1998, so there may be an upturn of activity in the machinery market before then," says Mr Arnold.

"Tax should, however, never be the overriding driving force when making an investment. It can make a good investment better – it cant make a bad one, good.

"Its the same with finance arrangements. The decision to buy a particular machine has to be right.

"You might get an excellent offer – but that doesnt necessarily mean buying the kit is justified in the first place."n

Robin Arnold: If theres cash under the bed, pay sooner rather than later.

Buying new? The choice of funding is almost as wide as the choice of tractors.

Sample costings based on machine costing £25,000 + VAT

Purchase Contract hire

Agreement period2 yrs 4 yrs 2 yrs 4 yrs

No of quarterly rents816816

Amount (£)3,3981,8682,1101,459

Annual cost(£)13,5927,4728,4405,836

Total cost (£)27,18429,88816,88023,344


&#8226 Tailor to your needs.

&#8226 Consider interest rates, repayment period and deposit.

&#8226 Consider tax.

&#8226 Shop around.

&#8226 Ask yourself: Do I need this asset at all?


&#8226 Less spent on new machinery.

&#8226 Replacement cycles lengthened.

&#8226 Lower trade-in values.

&#8226 Base rates steady or falling.

&#8226 Machinery financing options.

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