Open any machinery publication or attend any machinery event and it is hard to miss all the advertisements for machinery that offer 0% finance. However, scratch a little bit under the surface and it starts to become clear that there is no such thing as free money and someone must pay somewhere along the chain.
With global machinery sales under pressure, there is intense competition and manufacturers are looking at options to help boost sales. One of these is to offer finance packages at “0%”.
We ask is this a way of moving metal for the machinery manufacturers and would a farmer be better borrowing money directly from a bank and doing a straight deal with his local machinery dealer?
After all, manufacturers will most likely have accounted for the option of subsidised finance in their overall pricing model and adjusted selling prices accordingly.
But we don’t live in a world of unlimited finance and sometimes a farmer may be at his borrowing capacity, leaving him with few options to finance a new machine.
Therefore, in certain situations, where the manufacturer subsidises the finance, it can offer the perfect solution. There is the added convenience in dealing with one person for the trade-in, finance package and future servicing.
Scenarios
To help us better understand, we asked a number of machinery manufacturers, dealers and banks what options are available to a farmer who is considering changing his tractor.
To better illustrate, we made a number of assumptions. The farmer has a strong business that is profitable with a good cashflow. For simplicity, he is not registered for VAT. There may be different tax implications for each scenario, which we have not considered as this depends very much on an individual farmer’s circumstances.
We have assumed the farmer is buying a new 125hp tractor with a list price of €72,000 including VAT. This is the most popular power segment in Ireland and the price reflects the typical price for this size of tractor.
Farmer A has a five-year-old 100hp tractor with a market value of €36,000 including VAT. He will trade this in, which means the amount to finance is €36,000 (50% of the cost of the new tractor).The finance scheme from this manufacturer is for three years at 0%. It also requires the first payment up front (€12,000). Therefore, the farmer is putting up €48,000 between the trade-in and the first payment to satisfy the 0% finance conditions.
This means the manufacturer is financing the balance (€24,000), which is only 33% of the value of the new tractor. This gives a lot of equity and therefore offers low risk on this loan. Over the next two years, the farmer must pay €12,000 per annum. There is no cost for this credit.
This deal may suit a farmer who changes his tractor regularly, has a high trade-in value and has a high demand for cash in the business.
Farmer B is not trading in a tractor, has €19,000 in savings (26% of new price) to put towards the new tractor and is looking for a straight deal. Therefore the finance amount will be €53,000. The manufacturer finance scheme can offer 3.5% over five years. This works out at an annual payment of €11,738 and the total amount repayable will be €58,692. The cost of credit therefore is €5,692.While Farmer A is borrowing €24,000 for two years at zero cost, Farmer B is borrowing €29,000 more (€53,000) which will cost €5,692 over five years. This is a significant premium for the additional borrowing.
Farmer C wants to finance the full amount (€72,000) through his bank. The bank requires no deposit and sees this as a hire purchase contract arrangement. This means he will not own the machine until the final payment is made. For tax purposes and VAT (if registered) the tractor is considered owned by the farmer from day one. The typical APR for this type of deal is 5%. It should be noted that not all banks will allow for 100% finance and will require equity in the deal. The tractor after finance will cost a total of €83,150. The annual repayment is €16,630 and payments start at the end of year one. The cost of credit is €11,150 over five years. While this is the most expensive option, he has used no cash from the business and borrowed 100%. The bank is willing to finance this provided the farmer has a good working relationship with his bank and cashflow is sufficient to meet needs.
The bank does not see risk in the particular scenario as they have no equity in the deal. Most banks will require a cash deposit of some sort to avail of any of the HP arrangements which is usually between 10% and 25% of asset. This again will affect the rates and repayments.
In the long run, it is costing Farmer C more than Farmer A or B. In the short term, it provides better cashflows, as funds are not tied up. This option would allow the farmer to hammer out a better deal with his machinery dealer. The discount would need to be enough to make up the difference with Farmer B.
Regardless of what option is taken, in this world nothing is for free and cash still remains king. Farmers need to assess carefully the need for the new tractor and not be enticed into a deal because of 0% finance. Before any finance is talked about, understand the trade-in deal and the buying price of the tractor.
The small print needs to be carefully considered to fully understand the amount being borrowed and the cost of the finance over the term.
To read the full Agri Finance Focus Supplement click here.
Open any machinery publication or attend any machinery event and it is hard to miss all the advertisements for machinery that offer 0% finance. However, scratch a little bit under the surface and it starts to become clear that there is no such thing as free money and someone must pay somewhere along the chain.
With global machinery sales under pressure, there is intense competition and manufacturers are looking at options to help boost sales. One of these is to offer finance packages at “0%”.
We ask is this a way of moving metal for the machinery manufacturers and would a farmer be better borrowing money directly from a bank and doing a straight deal with his local machinery dealer?
After all, manufacturers will most likely have accounted for the option of subsidised finance in their overall pricing model and adjusted selling prices accordingly.
But we don’t live in a world of unlimited finance and sometimes a farmer may be at his borrowing capacity, leaving him with few options to finance a new machine.
Therefore, in certain situations, where the manufacturer subsidises the finance, it can offer the perfect solution. There is the added convenience in dealing with one person for the trade-in, finance package and future servicing.
Scenarios
To help us better understand, we asked a number of machinery manufacturers, dealers and banks what options are available to a farmer who is considering changing his tractor.
To better illustrate, we made a number of assumptions. The farmer has a strong business that is profitable with a good cashflow. For simplicity, he is not registered for VAT. There may be different tax implications for each scenario, which we have not considered as this depends very much on an individual farmer’s circumstances.
We have assumed the farmer is buying a new 125hp tractor with a list price of €72,000 including VAT. This is the most popular power segment in Ireland and the price reflects the typical price for this size of tractor.
Farmer A has a five-year-old 100hp tractor with a market value of €36,000 including VAT. He will trade this in, which means the amount to finance is €36,000 (50% of the cost of the new tractor).The finance scheme from this manufacturer is for three years at 0%. It also requires the first payment up front (€12,000). Therefore, the farmer is putting up €48,000 between the trade-in and the first payment to satisfy the 0% finance conditions.
This means the manufacturer is financing the balance (€24,000), which is only 33% of the value of the new tractor. This gives a lot of equity and therefore offers low risk on this loan. Over the next two years, the farmer must pay €12,000 per annum. There is no cost for this credit.
This deal may suit a farmer who changes his tractor regularly, has a high trade-in value and has a high demand for cash in the business.
Farmer B is not trading in a tractor, has €19,000 in savings (26% of new price) to put towards the new tractor and is looking for a straight deal. Therefore the finance amount will be €53,000. The manufacturer finance scheme can offer 3.5% over five years. This works out at an annual payment of €11,738 and the total amount repayable will be €58,692. The cost of credit therefore is €5,692.While Farmer A is borrowing €24,000 for two years at zero cost, Farmer B is borrowing €29,000 more (€53,000) which will cost €5,692 over five years. This is a significant premium for the additional borrowing.
Farmer C wants to finance the full amount (€72,000) through his bank. The bank requires no deposit and sees this as a hire purchase contract arrangement. This means he will not own the machine until the final payment is made. For tax purposes and VAT (if registered) the tractor is considered owned by the farmer from day one. The typical APR for this type of deal is 5%. It should be noted that not all banks will allow for 100% finance and will require equity in the deal. The tractor after finance will cost a total of €83,150. The annual repayment is €16,630 and payments start at the end of year one. The cost of credit is €11,150 over five years. While this is the most expensive option, he has used no cash from the business and borrowed 100%. The bank is willing to finance this provided the farmer has a good working relationship with his bank and cashflow is sufficient to meet needs.
The bank does not see risk in the particular scenario as they have no equity in the deal. Most banks will require a cash deposit of some sort to avail of any of the HP arrangements which is usually between 10% and 25% of asset. This again will affect the rates and repayments.
In the long run, it is costing Farmer C more than Farmer A or B. In the short term, it provides better cashflows, as funds are not tied up. This option would allow the farmer to hammer out a better deal with his machinery dealer. The discount would need to be enough to make up the difference with Farmer B.
Regardless of what option is taken, in this world nothing is for free and cash still remains king. Farmers need to assess carefully the need for the new tractor and not be enticed into a deal because of 0% finance. Before any finance is talked about, understand the trade-in deal and the buying price of the tractor.
The small print needs to be carefully considered to fully understand the amount being borrowed and the cost of the finance over the term.
To read the full Agri Finance Focus Supplement click here.
SHARING OPTIONS