Postponing a technology upgrade could be costly
While it can be tempting to try to squeeze every bit of life out of technologically sophisticated equipment before replacing it, that approach may be costly. The risk of losing a competitive cost and price advantage when using less efficient equipment is high. Also, system breakdowns can possibly damage customer relations if they delay product delivery or completion of contracted services.
Knowing your financing options makes it easier to update technology on a scheduled basis before problems occur. Most companies can tailor a financing plan to their cash flow, tax and balance sheet requirements.
Advantages of financing
Even when companies have the option of paying cash for a technology upgrade, loan and lease-based financing options can be a smart alternative for several reasons:
- Today’s low interest rate environment keeps financing costs moderate
- Cash remains on hand for sudden unexpected needs
- Cash flow planning and budgeting is simplified
- Should inflation pick up, future loan or lease payments are repaid with “cheaper” dollars
- Financing enables a regular equipment replacement schedule.
Creditworthy borrowers have flexibility in using debt to finance a technology upgrade. Often 100% financing is an option, although interest rates can be impacted by the proportion of the purchase that is financed.
Loan amortization schedules are generally pegged to the period the borrower intends to own the equipment before the next upgrade, known as the “useful economic value” period. That length of time might be shorter than the cost recovery period for tax purposes. For example, a company might establish a three-year cycle for replacing its inventory of laptop computers, even though the cost recovery period would generally be five years.
Ultimately, loan terms are largely determined by the borrower’s unique cash flow needs and timetable for replacing the new equipment. In addition, some equipment has better resale value, which also impacts the interest rate, because it lowers the lender’s risk if the borrower defaults and the lender must reclaim and sell the assets.
Financing a technology upgrade using a lease offers many benefits, most important of which is a financial structure matching the economic useful life of the equipment, thereby facilitating the planning of future operationally related technology upgrades. As such, leases offer flexible repayment terms — facilitating cash flow planning — and can offer technology upgrade features during the lease term. Leasing shifts technology asset risk to the lessor and relieves the burdens of ownership including asset disposal — selling equipment when it is replaced — along with other possible end-of-term services, including data eradication.
The impact of leasing options relative to a company’s financial statements and tax returns should be discussed with its CPA and financial advisors, with consideration of how the lease alternative may impact any loan covenants orother agreements.
Maintain competitive strength
Whether it’s IT equipment or operating equipment driven by technology and software, failure to keep your equipment up to date with advancing technology can jeopardize your company’s competitive strength. Taking advantage of the most appropriate equipment financing tools will keep you from finding yourself in that situation.
Want to learn more? Our experts can assist you in planning for and identifying the most cost-effective means to secure the equipment your company needs to maintain and grow your operations, while affording maximum flexibility with corporate capital.
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In all areas of legal and tax planning, we recommend that you consult with a legal and/or tax advisor.