There are a few options for acquiring or gaining access to equipment. You will definitely need to obtain some key items like slit lamps and exam chairs, but you might want to consider renting or using an offsite facility for lasers or diagnostics. Let’s go over the various equipment options.
Probably not an option for most of us. Even if you had the cash, I would still recommend against paying 100% upfront for your equipment. It’s probably a better idea to finance the equipment, and to hold onto additional cash reserves for your operating expenses. Although, you could consider buying the equipment outright, and then using it as collateral to acquire a working capital loan later. That way, you wouldn’t have to needlessly pay interest on equipment, despite having cash on hand. If you do decide to hold onto your cash, make sure to obtain an equipment loan with no prepayment penalty. That way, you can have the option to pay off your loan prematurely when your cashflow strengthens.
This would be the most conventional method of financing your equipment. As I have mentioned in previous posts, I originally thought that equipment loans would be as easy to obtain as a mortgage or auto loan. Apparently, that wasn’t the case for me. I had to go through multiple lenders to get approved. Since equipments loans are secured by the equipment themselves, they generally come with better terms and interest rates than unsecured cash loans. Given that medical equipment depreciates over 5 to 7 years, it is highly unlikely that you will get a longer loan term than 7 years with a conventional bank. Often times, banks will loan you for up to 75% of the equipment’s life expectancy, or 5 years. Also, the interest rates will be higher for longer term loans. Interest rates may be variable or fixed, depending on the type of loan. Banks will usually ask for a 10 to 20% down payment, and will also charge 1 to 2% in closing costs. Although conventional banks will make you jump through all these hurdles, they will typically offer you the lowest rates.
Equipment leases are pretty much like leasing a car. You’re not really “renting” the equipment, since you are committing yourself to making monthly payments for a certain period of time.
1. Capital Lease
A capital lease is pretty much the equivalent of bank financing. It usually comes in the form of a $1 buyout option, where you can purchase the equipment for $1 at the end of the lease term. Hence,you will be making monthly payments for essentially the entire cost of the equipment. Tax treatment will be the same as a bank loan. You would deduct the interest portion of your monthly payment, and depreciate the principal portion. Consider a capital lease if you don’t expect the equipment to become obsolete by the end of the lease and is worth keeping in your possession. (ie. slit lamps, exam chairs, etc.)
2. Operating Lease
Operating leases are more like the typical car lease, where you return the equipment to the lessor at the end of the lease term. Operating leases come in the form of a fair market value (FMV) lease or a 10% purchase lease. In a FMV lease, you would have the option to buy the equipment at fair market value at the end of the lease. In a 10% purchase lease, you would have the option to buy at 10% of the original purchase price. Because it will cost more to purchase the equipment at the end of the lease term, monthly payments will be lower. In addition, the entire monthly payment will be tax deductible. Obviously you won’t be able to depreciate the equipment though. Operating leases are probably better for equipment that becomes quickly obsolete and will need upgrades by the end of the lease term. (ie. computers, software, etc.)
The nice thing about leases are that they have a simple application process, they generally don’t require down payments, have fixed interest rates, and have cheaper closing costs ($100 to $200). Lease terms are usually 48 to 60 months, but may be as long as 84 months. Some companies also provide deferred or graduated payment plans, where there are no monthly payments or reduced payments for the first 3 months to a year or so. This option would be very nice for a startup, since you would be able to preserve cash longer, giving you a better chance to eventually become cashflow positive. Also, because sales tax is prorated into your monthly lease payments, it’s not actually applied toward your preapproved lease limit. For example, if you’re preapproved for $1,000, you can spend the entire $1,000 toward equipment, instead of applying $900 to equipment and $100 to sales tax. One final benefit is that leases don’t appear on your credit report because they are technically not considered loans. Hence, it could be easier for you to obtain other loans in the future.
Of course, in return, you’ll be paying a higher effective interest rate. Also, you will have no prepayment options. You will be committed to paying monthly payments to the bitter end. Some leases don’t even allow early termination, and the ones that do usually charge you hefty penalties.
Mobile Equipment Services/Rentals
There really aren’t too many options for renting equipment. Depending on your geography, you may be able to rent lasers, OCT’s, or even have ophthalmic photographers come in PRN to perform fluorescein angiograms. My area only offers laser rentals called roll-on/roll-off services where a technician brings in the equipment to your office, sets it up, and then takes it away after you finish using it. These industries make money through a per use fee. For example, a company might charge $100 for each SLT you perform. Because there usually is a minimum fee, practices schedule multiple procedures on one day. In turn, you would bill for both the technical and professional component of the procedure, and would be paid as if you had performed the laser with your own equipment in the office. Since the laser leaves the office at the end of the day, you have no responsibility for maintenance.
One last option you can consider is to take your patients to an ambulatory surgery center or hospital that owns the equipment or laser you need. The hospital would bill the facility fee, and you would bill the professional fee. You could also call around neighboring practices to see if you could use their lasers for a fee, or if you could send patients to get an FA or OCT only, for which that practice would collect the technical component. All of these options are inconvenient for patients who usually prefer a one stop shop. In addition, patients would have to go through all the lame paperwork to register with the ASC or hospital to get their laser done. However, it might still be better on your pockets to use this option rather than have your machine collect dust in the beginning when you’re seeing 3 patients a day.