Medical practices are constantly trying to keep up with the latest technology and equipment to meet the challenges they are facing in the field. Finding the right medical equipment financing product is key if the medical practice is going to be able to purchase the costly equipment without negatively impacting the business’s cash flow and assets.
There are two main options for equipment financing: equipment leasing and equipment loans. It’s important to understand the differences between each option to discover which is best for your practice. Let’s look at each option's basic terms, qualifications, requirements, and benefits.
How Equipment Leasing Works for Medical Practices
Equipment leasing allows medical practices to rent equipment from a retailer, distributor, manufacturer, or leasing company for a specific period. At the end of the lease, the company must return the equipment, renew the lease, or purchase the equipment with a buyout at the end of the lease (Sometimes a $0 buyout). A lease is NOT a loan.Leasing equipment costs more than a loan in the long run and charges a factor rate versus a principal and interest rate. However, leasing can mean lower monthly payments for the business, and there is potential for a $1 buyout at the lease's end. This effectively functions similarly to a medical business loan in that you can own the equipment outright at the end of the financing.
Equipment leasing can be beneficial, but you have to be careful about the details of a lease.
There are two main types of equipment leases: capital leases and operating leases.
Capital leases are similar to equipment loans in that they’re structured to where the business will likely buy out and own the equipment at the end of the lease term. This type of lease has higher payments than an operating lease because it usually has a $1 buyout at the end. Thus, the business does not have to pay fair market value at the end of the lease to purchase the equipment.
Operating leases, also known as fair market value leases, are equipment leases in which the business wants to make the lowest payment possible to acquire the equipment without the possibility of a cheap buy-out option at the end of the lease. Lessees will have to pay fair market value if they wish to purchase the equipment at the closure of the agreement.
Always ask what happens at the end of a lease. Is there a buyout?What is the fair market buyout amount? Do you have to return the equipment at the end of the lease? Look at the fine details of the terms before making a final decision.
Terms
Cost: Factor rates, not principal and interest, which are accounted for in the lease agreement. Higher upfront costs may apply with certain vendors and contracts.
Down Payment: Can range from 0% to 25%, typically concerning the buying costs of the rental equipment.
Term: Anywhere from 1 to 5 years, over which the depreciation and lifespan of leased medical equipment are factored.
Payments: Structured on a monthly basis. These payments can sometimes be applied to a final purchase, resulting in eventual ownership of the equipment.
Warranties: Most lease agreements cover two- to three-year warranties, reducing repair costs and providing a valuable deduction.
Qualifications
Credit: All Credit Considered
Equipment: Description of equipment must be approved
Requirements
- 1-page application (Online or over the phone)
- 3 months Business Bank Statements
- Invoice for equipment (description of equipment and source of purchase)
Pros of Equipment Leasing
- Affordable payments: Healthcare facilities can manage their healthcare finance effectively as the leasing companies often cover the costs of equipment repairs and maintenance. In addition, these leasing companies frequently provide an efficient means of integrating patient data systems, affording hospitals access to cutting-edge technology without exorbitant upfront costs. This results in reduced overhead costs for the healthcare industry.
- Longer terms: With terms as long as three to five years, healthcare equipment leasing provides ample opportunity not just for equipment upgrade and modernization but also for improvement in data management systems with affordable monthly payments.
- Turnover of Equipment: If your healthcare facility constantly requires upgrades or you need to ensure compliance with the latest healthcare regulations, leasing can make more sense than purchasing outright.
Cons of Equipment Leasing
- Higher costs than principal and interest business or equipment loans: Despite the benefits of direct access to the latest patient data solutions, healthcare equipment leasing can entail higher costs in the long run, especially if you compare it with principal and interest business or equipment loans.
- Buyouts at end of Lease: Leases have buyouts and there may be a cost at the end of the lease to buy the equipment. The cost is typically the depreciated value at end of lease. Some leases have $0 buyouts at end of lease which would be preferable.
- There might be less flexibility with modifications and repairs as the consent of the leasing company is often required. Placing a strong focus on the means of data management could significantly enhance the operational efficiency of healthcare facilities.
How Equipment Loans Work for Medical Practices
Equipment loans also finance medical equipment and are secured by the financed asset. Equipment loans are available from various providers, including traditional banks and alternative lenders. Depending on qualifications, rates typically range from 6% to 9%, and lenders generally charge origination fees between 1% and 3%. Equipment loans, unlike equipment leases, can be used for larger amounts into the millions.
Although equipment loans have the most favorable terms, they can be more difficult to acquire, as many banks and lenders look more at the business's overall health and not just the business owner's credit. Depending on the amount requested, providing two years of business tax returns, six months of bank statements, and YTD profit and loss and balance sheets is not uncommon.
Terms
Loan Amounts: $10,000 up to the millions
Interest Rates: 6% to 9%
Down Payment: 0% to 25%
Term Duration: 2 -15 years
Qualifications
- All Credit Considered
- Description of equipment must be approved
Requirements
- 1-page application (online or over the phone)
- Invoice for equipment (description of equipment and source of purchase)
- 3 months of bank statements
- Business Tax Returns
- Financial Statements such as Profit & Loss and Balance Sheet
Pros of Equipment Loans
- Low principal and interest rates: Rates are typically lower than equipment leases due to there stringent approval requirements and additional paperwork required for approval.
- Long term: Terms can range from 2 to 7 years to repay depending on qualifications.
- Monthly payments: Payments are usually monthly and deducted based on an auto-ACH process.
- No prepayment penalties: No penalty to pay off equipment loan early in most cases. Check your agreements for this clause before signing.
Cons of Equipment Loans
- Requires significant paperwork: Unlike equipment lease, business loans require more documentation for approval including business tax returns, profit & Loss, balance sheet, accounts receivable/accounts payable aging reports.
- Processing times 1-2 weeks: Due to extra paperwork and a more detailed vetting process, the underwriting times are much longer than a equipment lease, but if you have the time the rates and terms are better usually with a, equipment loan.
What to Consider When Choosing Between an Equipment Lease and an Equipment Loan
The following list of items are things to consider when choosing between am Equipment Lease vs. Equipment Loan:
- The interest rate or TOTAL costs of over the life of the lease or loan
- Origination fees and/or costs
- Monthly Payment
- Length of time of repayment in years
- Required Paperwork
- Length of the process from application to funding
- Down payment requirements
- Qualifications
- Is there a buyout option at the lease end? -Considering the lifecycle and cutting-edge upgrades of the equipment leased, and the reasonable provision of these upgrades in the lease agreement.
- The possible resale value (equity) of the healthcare equipment when selling it
- Identifying trustworthy equipment leasing organizations for partnerships.
- Including an understanding of the possible expenditure in terms of modifications to the leased machine and its impact on the lease agreement
- Any restrictions in modifying or upgrading the leased machine as per the lease agreement.
- Weigh the value of having the flexibility to frequently upgrade equipment without dealing with the complex accounting of selling outdated healthcare equipment at end-of-lifecycle.
- Understanding the considerations of building practice equity with the leased machine, remembering that paying off a lease doesn't necessarily increase the value of your practice since you won't own the equipment at the end of the agreement.
**Carefully evaluate the above items before making any final decisions on which equipment financing product to choose.
The Bottom Line When Choosing Between an Equipment Lease and an Equipment Loan
Choosing between an equipment lease and an equipment loan may come down to which you can qualify for. In the healthcare finance world, this could be a pivotal choice. For healthcare professionals, leasing usually requires less paperwork and receives higher approval rates than loans. This makes it possibly a more streamlined option for small healthcare facilities. But it has to be recognized that the terms provided by equipment loans might ultimately offer more benefits.
If you have the time and necessary financial paperwork to apply for an equipment loan, it might be in your best interest to do so. On the other hand, equipment leasing, more popular in the health care equipment leasing market, could be the optimal solution if you need the equipment swiftly, often and prefer smaller payments and the flexibility not found in typical loans, along with the bonus of not dealing with equipment depreciation. An analysis of both the options can further aid in making an informed decision.
Ensure you peruse through the lease terms to comprehend the buyout process at the end of the lease. If your ultimate goal is to consider the leased equipment as a tax deductible business operating expense or to become the owner of the equipment after the lease ends, then capital leases may be a better choice.
Like any financial product chosen for your healthcare facility, always compare offers and apply for multiple products. It's a smart move to explore multiple lending options to determine what your medical practice can qualify for and the best available option for your business.
