Business Expansion

Lease or Buy Medical Equipment: What’s Best for Your Medical Practice?

Last updated on March 11, 2020

Jacques Famy Jr

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 when it comes to 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 the basic terms, qualifications, requirements, and benefits of each option.

How Equipment Leasing Works for Medical Practices

Equipment leasing provides medical practices the ability to rent equipment from a retailer, distributor, manufacturer, or leasing company for a specific period of time. 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 leases end. This effectively functions like a 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 an equipment lease 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 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 asset being financed. Equipment loans are available from a variety of providers, including traditional banks and alternative lenders. Rates typically range from 6% to 9%, depending on qualifications, 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 overall health of the business and not just the credit of the business owner. Depending on the amount requested, it is not uncommon to have to provide two years of business tax returns, six months bank statements, and YTD profit and loss and balance sheets.

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 when it comes to 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 the basic terms, qualifications, requirements, and benefits of each option.

How Equipment Leasing Works for Medical Practices

Equipment leasing provides medical practices the ability to rent equipment from a retailer, distributor, manufacturer, or leasing company for a specific period of time. 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 leases 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 an equipment lease 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 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 asset being financed. Equipment loans are available from a variety of providers, including traditional banks and alternative lenders. Rates typically range from 6% to 9%, depending on qualifications, 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 overall health of the business and not just the credit of the business owner. Depending on the amount requested, it is not uncommon to have to provide two years of business tax returns, six months bank statements, and YTD profit and loss and balance sheets.

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 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 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. If you have the time and the financial paperwork necessary to apply for an equipment loan, it is probably a good idea. 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 details of the lease to determine the buyout at the end of the lease. If you want to keep the equipment after the lease ends, capital leases are the better way to go.

As in any financial product you are choosing, always compare offers and apply for more than one product. It’s always a good move to shop around so you can determine what your medical practice can qualify for and what is the best available option for your business.

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 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 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. If you have the time and the financial paperwork necessary to apply for an equipment loan, it is probably a good idea. 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 details of the lease to determine the buyout at the end of the lease. If you want to keep the equipment after the lease ends, capital leases are the better way to go.

As in any financial product you are choosing, always compare offers and apply for more than one product. It’s always a good move to shop around so you can determine what your medical practice can qualify for and what is the best available option for your business.

* All loans made by either WebBank, an FDIC-insured Utah industrial bank, or Bank of the Internet Federal Bank, an FDIC-insured federally chartered thrift located in California. In connection with the loans, the Banks' underwriting conditions and terms apply.