Brad Stern, a vice president in the healthcare financing division of Wells Fargo Equipment Finance, provides four questions to ask yourself when you are considering acquiring medical equipment.
1. How do you want to pay for it? You can buy the equipment, paying cash or financing with a loan, or lease the equipment. Each option has the following pros and cons.
Pros of buying. Tax incentives for purchasing equipment have been extended in 2011 by the Tax Relief and Job Creation Act of 2010. Small organizations can expense the full cost of capital equipment acquired in 2011up to a specified limit. The act also permits a taxpayer to accelerate the tax depreciation benefit available during the year of purchase for most types of equipment acquired and put into service in 2011. However, this "benefit of bonus depreciation" may also be available in a lease transaction. The structure of the lease may make the lessee the owner for tax purposes, such as certain leases with nominal purchase option amounts. And in true leases, the lessor gets the tax benefit and then passes along the economic benefit to the lessee as part of the lease pricing. "Speak to your accountant or other tax advisor to determine how these tax benefits may apply to your organization," Mr. Stern says.
Cons of buying. Loans can lack the flexibility of leases. For example, organizations might want to match their payments to revenues or build in the option to upgrade or add on to technology as it becomes available or as the organization grows. These features are more typically associated with leasing.
Pros of leasing. Monthly payments and initial down payments tend to be lower with a lease than with a loan. "Leases may also allow for more end-of-term flexibility than a loan," Mr. Stern says. "Depending on the specific structure, a lease may provide options to purchase the equipment for a pre-negotiated price, return the equipment or upgrade to the latest technology." A lease can be a less costly structure if you end up returning or upgrading the equipment.
Cons of leasing. Although payments are typically lower with a lease, the overall cost might be higher than buying if you decide to keep the equipment and purchase it at the end of the lease term. Also, depending on the lease structure, you might never own the equipment.
2. How long do you want to make payments? "Focus on three key measures when negotiating payments," Mr. Stern says. First, what is the expected useful life of the equipment? Second, how much it will cost to operate the piece of equipment, and how much revenue you expect it to generate? Ideally, the revenue will cover the cost of operating the equipment and the lease or loan payments. Third, look at your current and future cash flow. Do your financing terms leave room for personnel and other operating expenses?
3. How should the deal be structured? In addition to term and rate, there are other strategic choices to consider. Start-ups should make sure to consider the time needed to set up operations. To account for this, they may want to structure financing to include smaller interim payments after the equipment is ordered and before it is used to treat patients. If your organization is a partnership or physician-owned, ask your attorney and accountant to review the transaction structure and documents to help you understand the total costs and benefits before signing a financing agreement or guaranty.
4. Who do you want to be lender or lessor? Generally, ambulatory surgery centers have four options. National banks and their affiliated equipment finance companies typically have dedicated healthcare experts, offer a variety of structures and understand your financial picture and business objectives. Local banks have deep roots in the community, might know the physician applicants personally and might be able to help navigate local politics. Independent leasing companies may have a higher risk appetite or knowledge of a particular specialty equipment niche. Finally, vendors that offer financing can be competitive on price but are frequently limited to financing only the equipment they manufacture.
Learn more about Wells Fargo Equipment Finance.
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