Most farmers and contractors go out to buy a tractor based more on its specifications than its finance costs. However, it is important not to forget the finance costs before you get carried away with the specification.

Farm machinery finance options include hire purchase, leasing and term loans. Remember that you can also get access to tractor power by means of short-term contract rental. While there are now fewer providers in the finance market than six years ago, you have to be judicious in terms of your choice of finance options and finance company.

Most farmers are buying tractors using a hire purchase agreement. In this situation, often called a lease purchase, the equipment is owned by the finance company until the final payment has been made.

The machines can be added to the tax pool of the farm and a capital allowance of 12% is available to the farm on a reducing balance basis.

Leasing is making a comeback on farms, especially those converting into limited companies. Leased machines are owned by the finance company, which claims tax relief on the ownership of the machine while the user claims tax relief on the value of the rental payments.

In some situations, the interest rate charged in the finance deal, lease or hire purchase may be subsidised by the machinery manufacturer. This can provide a cheaper source of finance and lower the repayments.

Finance rates are often quoted on a flat rate per annum. For example, a 3% flat rate for a four-year agreement is calculated as 12% of the cost of the equipment and added on a pro rata basis to the instalments of capital.

The interest on agreements with monthly or quarterly instalments can be converted from a flat rate to a true rate by doubling the flat rate and subtracting 1%. The larger the deposit and the less frequent the instalments, the higher will be the true rate compared with the flat rate.

The most accurate way of comparing quotes for machinery finance is to ask the finance company for the annual percentage rate (APR).

The figures in Table 1 are a sample and there may be some finance companies with quoted rates higher or lower than shown. There will also be some scope for negotiation on the rates shown based on a number of factors, such as the financial strength and previous credit history of the customer, size of loan, period of loan, type of equipment involved, etc.

Some machinery manufacturers offer special low-cost subsidised finance packages. For example, one manufacturer offers 0% finance over two to three years on 60% of the list price. Another manufacturer offers three years finance at 4.0% APR, four years at 5.2% APR and five years at 5.75% APR. These schemes can vary from time to time and apply to certain ranges of equipment.

The interest rate on hire purchase and leasing agreements is usually fixed at the start for the full period. Bank term loans may have fixed or variable interest rates. Check out the variety of repayment schedules to suit the cashflow situation for different farms.

€50m for machinery finance at AIB

AIB’s recent €50m programme for Asset Finance is aimed at supporting ongoing investment in farm machinery. Finance is available over a two- to five-year period. AIB can have pre-arranged finance in place to allow you to negotiate a better deal on the purchase price of your new vehicle or equipment.

With the AIB Business Purchase Plan (Hire Purchase), you borrow money over a fixed period of up to five years. The asset becomes your property when you have paid the final instalment and the purchase fee due under the agreement.

The interest rate for a hire purchase agreement is normally fixed for the term of the agreement.

With this type of hire purchase agreement, the fixed rate of interest for the full term makes it easier to manage cashflow. The VAT may be reclaimed on the purchase price if you’re registered for VAT and capital allowances may also be claimed. The interest charges may be offset against taxable profits.

0% finance options

Tractor dealers, such as WR Shaw based in Tullamore, provide a selection of special offers across a wide range of agri products in conjunction with AIB Finance. It recently offered a finance scheme on new New Holland and ex-hire tractors. It can tailor this scheme to suit a longer period in some situations. See Table 2.