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. 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
Down Payment: 0% to 25%
Duration: 1 to 5 years
Payments: Monthly
Qualifications
Credit: Good to excellent credit (typically 680 FICO and higher)
Equipment: 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)
Pros and Cons
- Affordable payments
- Long terms
- Higher costs than principal and interest business or equipment loans
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
- Credit needs to be good to excellent credit (typically 680 FICO and higher)
- 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)
- 6 months of bank statements
- 2 years of Business Tax Returns
- YTD Profit & Loss and Balance Sheets
- Accts Receivable/Payable Reports (if applicable)
Pros and Cons
- Low principal and interest rates
- Long term
- Monthly payments
- No prepayment penalties
- Requires significant paperwork
- Processing times 1-2 weeks
What to Consider When Choosing Between an Equipment Lease and an 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?
- The resale value of the equipment when selling it
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. Leases have less paperwork and tend to have higher approval rates than loans, but loans have better terms. It is probably a good idea if you have the time and the financial paperwork necessary to apply for an equipment loan. The investment in that process may provide big savings.
Equipment leases are great if you need the equipment fast and wish to make smaller payments than what is typical for a loan. You must check the lease details to determine the buyout at the end of the lease. If you want to keep the equipment after the lease ends, capital leases are better.
As in any financial product you choose, always compare offers and apply for multiple products. It’s always a good move to shop around to determine what your medical practice can qualify for and the best available option for your business.
