How Equipment Finance Can Impact your Borrowing Capacity
In his 2021 budget speech, Treasurer Josh Frydenberg announced the extension of the instant asset write-off and a lift from $30,000 to $150,000 for new business equipment finance.
The extension is good news if you want to purchase a new piece of farm equipment because of the tax incentive it gives your business, but there can be unintended consequences if equipment finance hinders your ability to take on a loan to grow the farm.
So the answer becomes a balance between lifting productivity with new farm equipment that can cut labour costs and sow or harvest more precisely with more land to farm.
When considering farm equipment, you can rule out smaller purchases like a new ute because these do not significantly impact your borrowing capacity. Instead, consider the impact of equipment that costs $500K or more.
A simple case study to consider; a farmer wants to expand production and is weighing up buying on-farm grain silos $500K to store their grain and cut costs, or they could purchase the farm next door for $2 million and produce more grain overall.
In this scenario, the loan term on the grain storage assets is five years, versus 20 years, to pay the loan for the additional land. As unlikely as it seems, the monthly finance payments are lower for the $2 million loan because they have longer to pay, and in this instance, the better decision is to buy the neighbouring land.
Ultimately, it comes down to goals and making investment decisions that align with them. If you are at all uncertain about how to strike the right balance, speak with your Sprout Agribusiness advisor.