| MEDICAL
EQUIPMENET ACQUISITION
What
is the best way to acquire capital equipment? Purchase with cash?
Finance purchase? Lease? Although this newsletter provides solid
guidelines to help you evaluate purchase choices, it is not a substitute
for consultation with your professional financial advisors (e.g.,
accountant, tax attorney). This article assumes that you have done
diligence and know that the overall cost of obtaining equipment
will bring in sufficient income to offset your investment.
What
Is the Range of Options for Equipment Acquisition?
Cash
Payments
This
option assumes that there is enough cash available.
Advantages:
•
It’s simple and quick.
•
Everybody accepts cash
•
Cash purchases minimize paperwork and middlemen and may help reduce
purchase price.
Disadvantages
• It’s generally not a good use of funds.
In
today’s investment market, you can often obtain a yield on your
money in excess of the interest charged for financing the equipment
purchase. The only rationale for paying cash for the purchase is
if your funds are in a low-paying account (e.g., a passbook savings
account yielding 3%) whose yield is less than the interest on a
loan or lease. In that case, taking the funds from a low-yield account
and losing the 3% interest in order to avoid paying 9% or 10% is
a sound financial decision. Of course, having significant funds
in a 3% account is not wise cash management.
Financed
Purchase
In this method of purchase, a lender provides funds for the purchase
and generally obtains some form of lien or other encumbrance on
the equipment until the funds have been repaid.
Advantages
• It does not deplete cash flow. (Usually a 10% to 20% down
payment of the total purchase price is required. (In many cases,
the income generated by the equipment can exceed the payments.)
• Funds not expended for a cash purchase can possibly earn
a higher-income yield than the interest rate of the loan. Disadvantages
• Interest rates may be high.
• The down payment may be high.
• The equipment is encumbered by a third party (unless the
funds are borrowed from a source other than a financial institution‹for
instance, from your pension fund).
Lease
A lease offers an alternative to traditional financing. With a lease,
the equipment is owned by the leasing company. The practice makes
payments to the leasing company in exchange for being able to use
the equipment (i.e., essentially rental payments). Leases can be
closed-ended, in which case the leasing entity retains the equipment
at the end of the lease term. There are also open-ended leases,
where at the end of the lease term a predetermined amount is paid
to the leasing entity, and the practice attains ownership of the
equipment.
As
a general rule, the higher the residual value (balance owed) at
the end of the lease, the lower the monthly payments.
Advantages
•
Generally
little or no down payment is required.
• Leases are often supported by the equipment manufacturer,
which can lower the interest rate or the residual payment (the
amount required to attain ownership of the equipment at the end
of the lease term).
• Leasing can give you the ability to obtain more purchasing
power from a given amount of available cash.
• Sometimes equipment becomes obsolete in a relatively brief
period of time. A closed-ended lease may allow you to use the
equipment during its useful life and return it to the leasing
entity at the end of the lease term with a lower total expenditure
than an outright purchase would have required.
Disadvantage
• More interest is paid than in any other form of acquisition.
Other
Leasing Considerations
- Trade
up‹An equipment manufacturer may have a lease or purchase program
that will allow significant credit for the equipment you’ve acquired
from them when you move up to a more current model or to newer
technology. This can alter the calculation of the best option
for acquisition.
- Supported
Leases or Financing‹An equipment manufacturer may support the
interest rate of a lease or financing plan and may lower lease
payments by increasing the residual value of a closed-ended lease.
Again, these special offers may significantly alter the assessment
of the best acquisition option.
- Purchase
Price‹No matter what financing option you choose, do not ignore
the purchase price. Negotiate your best price before you evaluate
financing. Do not fall into the trap that automobile dealers have
used for years: “You can have the latest and best visual fields
machine for only $49.95 a month!” You should always start with
the purchase price and then move to the terms (whether lease or
purchase).
-
Beware of the Lease That’s Not a Lease‹The Internal Revenue Service
may consider an open-ended lease with a purchase option to be
a purchase contract rather than a lease. The impact of this is
that the lease payments may not be deducted as expenses, and instead
the equipment will be capitalized and depreciated. Have your professional
financial advisors evaluate the financing contract to assess your
level of risk.
- Each
Transaction Is Unique‹Each piece of equipment you are considering
for acquisition must be evaluated in the context of the following:
a. Purchase price
b. Projected useful life of the item
c. Your current cash position and monthly cash flow
d. Your current and projected future tax position
e. Financing incentives offered by the vendor
f. Careful evaluation of the lease or financing contract to ensure
that it meets the requirements for the method you plan to use
to report the equipment in your tax filings
g. Any other considerations required by your expert financial
and tax advisors
Discussion
In today’s financial and tax environment, many of the factors that
favored one type of financing over another have disappeared. What
remain are the purchase price and financing terms, whether the transaction
is called a lease or a purchase. Keep in mind that today’s market
is not as good as it was last year. In the final analysis you may
find that purchasing is cheaper than the interest cost on a lease.
For
equipment that you anticipate retaining at the end of the lease
or financing term, the purchase price, down payment, monthly payments,
and total payments (principal and interest) are key. These factors
can be impacted by incentives from the vendor, but ultimately the
same evaluation needs to be done (purchase price, down payment,
monthly payments, and total payments).
Secondary
issues may include tax advantages and other concurrent acquisitions.
If
you think that eventually you may be recycling the equipment‹trading
up to more current or more capable models‹the evaluation changes;
and a lease, especially one that is artificially supported by the
vendor, may be a better way to go.
Finally,
if you are just starting out in a new practice or have just acquired
an existing practice and need to upgrade equipment, current cash
availability and projected cash flow may dictate that you finance
the acquisition with the lowest possible cash outlay, even if the
ultimate total of funds required is significantly higher. Remember,
however, to GET ADVICE from a PROFESSIONAL (your financial and tax
advisor).
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Ron
Rosenberg, PA, MPH, Author , Practice Management Resource Group
Irene Chriss, Editor, Director, AAO Practice Management Dept.
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