Medical Equipment Financing
Medical professionals, in general, prefer leasing medical equipment or borrowing money from the bank in order to finance the purchase of their equipment. The decision regarding whether to buy or lease depends on the nature of the equipment. Generally, ownership is desired when the object under consideration is expected to appreciate in value. A purchase is justified in case of objects that depreciate, provided the buyer can recover the amount of money invested. Generally, any office equipment has a useful life of 7 years. Medical equipment too is depreciated over a period of 7 years. Considering the cost involved, the depreciation, and the chances of obsolescence, leasing it is a better option as compared to financing the purchase with a bank loan.
Finding Capital For Medical Equipment Financing
Leasing
Leasing medical equipment has a number of advantages. The biggest advantage, in addition to the low cost of leasing, is the ability to keep up with new technology. Depending on the need and the intention of the lessee (medical professional), he can opt for an operating lease or a capital lease.
Operating Lease
In this case, the medical professional pays a ‘rent’ for the use of equipment, according to the terms of the lease agreement. The lease payments (rent) are treated as an operating expense, and hence, can be deducted before paying tax. This results in lowering taxes that have to be paid by the medical professional. Moreover, he has no liability because he has not bought the equipment by taking a loan. This is advantageous for a medical professional who intends to avail a loan at a later date, since no or less liabilities make him an ideal borrower. Hence, when it comes to leasing medical equipment, an operating lease is the way to go.
Capital Lease
A lease is classified as a capital lease in the following situations:
- In case at the end of the leasing period, the transfer of ownership from the lessor to the lessee is allowed.
- If the leasing period is greater than 75% of the life of the medical equipment.
- In case the lessee has the option to buy the equipment, ‘for a bargain’, at the end of the leasing period.
- If the fair market value of the equipment is less than 90% of the present value of lease payments discounted at the appropriate rate.
In the case of a capital lease, the medical equipment is considered as the asset of the medical professional, and the present value of the lease payments are his liabilities. The lease payments are not tax-deductible because they are financing expenses. The lack of tax benefit makes a capital lease less desirable as compared to an operating lease. Again, the present value of lease payments are considered as a liability by the banks and other lending institutions. Hence, it is not ideal for a professional who intends to obtain bank loans in the future.
Obtaining a Bank Loan
Medical equipment financing can be achieved by obtaining a loan from the bank. The banks may expect a down payment equal to 20 to 30% of the cost of the equipment. Sometimes, lenders may expect collateral. The absence of collateral may result in the medical professional having to pay a higher interest on the loan. Obtaining a loan is not difficult, and is justified in case the medical professional intends to use the equipment for a long period of time.
Buying medical equipment is a costly investment. Leasing gives the professional the flexibility of using the equipment without locking in a huge amount of money. The cost of maintenance, freight, repair, and installation may be included in the lease. The lessee may also have the option of buying the equipment at the end of the leasing period, thus, saving him/her a huge amount of money on leased medical equipment.
