Machinery finance options have been restricted
Options for machinery finance have become more restricted over the past number of years.
The number of lenders is reduced, with two or three previously prominent names no longer active in the Irish market.
Many tractor and farm machinery suppliers used to offer credit, typically under their own brand names, but often back-ended by one of the larger finance houses. Many of these self-branded finance options have been withdrawn, with others being restructured.
Most notably, New Holland Finance is now back-ended by a relatively new entrant to the Irish market, De Lage Landen, having previously been supported by Bank of Ireland Finance.
De Lage Landen, an offshoot of Rabobank, is a welcome entrant to the Irish market, providing additional competition in a market suffering from a decline in providers.
It would be in the interest of farmers collectively if more new entrants broke into the Irish market.
Despite farming being seen by many as a saving grace of the economy, the rates charged for finance do not in general reflect a sector delivering better than average returns than other sectors of the economy.
In fact, headline rates for farm machinery finance have crept up by as much as 3% over the last number of years.
Another recent development which has in effect reduced farmers’ options for financing has been the change in VAT rules, known as the second hand VAT margin scheme.
The new rules introduced a few years ago now work against unregistered farmers who are looking to lease secondhand machines, whereby VAT at 23% becomes an additional cost when leasing a machine, as opposed to minimal VAT applying in the case of either a straight purchase or a hire purchase agreement.
On the ground, machinery dealers are saying that the new rules are causing big differentials in trade-in values, depending on whether VAT can be recovered by the dealer or not.
Further blockers to machinery purchase and finance come in the form of new or stricter terms imposed by the many lenders, with common terms now including no lending for machinery older than 10 years, a 30% deposit being required, and no finance available for terms of more than three years.
The lending rates can vary significantly between different finance houses, with the higher interest charges amounting to differences of thousands of euro of additional interest in some instances, over the term of the finance period.
At the outset, before signing up for any deal, you should check and compare the lending rates you are being offered.
It can be difficult to compare lending rates, given that some providers will quote annual, biannual, monthly or quarterly repayments, sometimes in arrears, or alternatively in advance.
Your one sure way to compare the underlying interest rate is to ask for the “APR” or annual percentage rate, which will allow you compare like with like.
The question often arises as to whether it’s more advantageous to lease a machine instead of hire purchase, finance by a normal commercial loan, or outright purchase.
In short, there are no easy answers, because it depends on the circumstances at hand, with leasing more suitable in some instances, and HP more suitable in other circumstances.
In most cases, a VAT-registered farmer will shy away from leasing, given that HP or commercial finance allows a VAT-registered farmer to obtain their VAT refund immediately rather over the period of a lease.
For unregistered farmers, under the new margin scheme rules, leasing is at a disadvantage compared to hire purchase, due to the additional VAT cost, but leasing does allow for a quicker timeframe over which the cost of the machine can be claimed for tax purposes.
As always, each individual’s circumstances should be looked at for the best advice.
