Structuring a Lease Agreement with Future Upgrades in Mind
Think about the next purchase before the current investment is even final
When many of our clients are getting ready to make a new equipment purchase, they’re so busy researching machines, thinking about improved efficiencies and calculating ROI; they often forget one crucial question. As technology advances, how quickly will I be looking to make the next upgrade?
It might seem out of order to think about the next purchase before the current investment is even final, but a little bit of forethought can help you avoid major headaches and financial missteps when it’s time for the next upgrade.
First, determine the useful life of the equipment. It’s always wise to do this when setting the initial term of your lease or loan. But it’s especially true if you’re considering frequent upgrades. Loans are structured with the ultimate goal of long-term ownership. The last thing you want is to be stuck with an obsolete piece of equipment owing a lender more than the resale or trade-in value of the existing equipment when it’s time to upgrade.
Next, consider cash flow needs. A bank loan with a shorter-term will require you to make more substantial monthly payments in addition to a potentially large down payment.
If you’re looking to keep payments low while still having only a short-term obligation, you might want to consider a lease structure over a traditional loan. Because leasing companies understand the equipment you’re working with better than a traditional bank, you’ll have more flexibility to structure the term to meet your specific needs:
- Short term (one to three years)
- Options to upgrade at the end of the term
- Little or no down payment
- Lower payments than traditional bank loans
Most lease terms give you the option to purchase the equipment at the end of your agreement or return it so you can upgrade to the latest technology. This flexibility combined with lower payments and a shorter-term length might make a lease the ideal scenario for your organization.
Every company is different, and no finance agreement will be a one-size-fits-all solution. However, doing your research and understanding that you can structure a finance agreement to fit your specific needs can help keep you get the newest equipment while still saving you money.