How to avoid Break Costs.
The best ways to avoid break costs include:
- Aligning the finance term with the asset’s expected useful life
- If there is a possibility that the asset will need to be replaced, a higher balloon payment rather than a longer term may be preferable
- Ensuring the repayment structure is aligned to your cashflow (a repayment structure that is misaligned can create cashflow issues which, in turn, may lead to the need to restructure and payout the finance contract and through this, incur Break Costs)
In most cases, you will incur break costs if you need to pay out finance with a fixed interest rate.
The size of that will be determined by:
- The difference in interest rates between when the contract was signed and now
- The term remaining on the contract
While Break Costs are sometimes unavoidable, in my experience, when it comes to finance, ensuring you have the right finance structure and term from the outset is the best way to avoid financial pain down the track.
If you would like to learn more, or are thinking about equipment finance, don’t hesitate to get in touch.