- John Russell/
- January 2019/
Six questions to ask yourself when considering equipment financing
When it comes to financing medical equipment, there’s one question that needs answering above all others: “What is the useful life of this equipment?”.
Getting finance right is all about matching the structure of the asset to the structure of the finance – which means understanding when it would be better to buy and when to lease, as well as the structure of your lease and its effect on your practice’s bottom line.
An endoscope will have a useful life of 5 years if you’re lucky, and may need maintenance along the way, whereas a standard hospital bed could last almost indefinitely (between 10 and 15 years at least), and is likely to cost less to maintain. They are different assets, with different characteristics, and so should their financing be.
That’s why I have prepared a checklist of questions to ask yourself before entering into any purchase or finance agreement. But the bottom line is that making the right decision means getting the right advice, which is where a specialist in the field of medical equipment can be your best resource.
1. What is the useful life of the equipment and will it need upgrading or maintenance?
Once you have decided on the likely life of your equipment, the next question is how much service and/or maintenance it will require.
Most vendors of medical equipment offer maintenance and service of the equipment as part of their offering. This makes sense, because the vendor is often best-equipped to service its own complex medical equipment. However, there will be a cost for this service, even if that cost is built into the lease payments themselves, so make sure you understand what the exact cost is and shop around to compare.
2. Is there a formula that dictates whether owning or leasing is better?
There’s no hard and fast rule here, and a great deal depends on your business – which is why speaking to an equipment finance specialist is so important.
As a rule of thumb, however, my view is that equipment that is likely to need upgrading in under 5-6 years is better leased, but for equipment with a longer lifespan, either option can work.
Speak to a specialist asset finance provider about what the options are, as there can be ways of consolidating a purchase price and an ongoing lease into one payment.
3. What is the total cost of the equipment?
A typical lease is priced in two parts – the ongoing lease payments and the residual value at the end of the lease term. In some cases, the residual value can be substantial, and in other cases, medical professionals can find themselves locked into upgrades with the original vendor with no ability to change product.
Locked-in upgrades aren’t necessarily a problem, and in some cases can mean lower total costs over the long-term if you stick with one provider, but it’s important to understand what you are signing up for, including the total cost and length of your finance agreement.
4. What if I don't want the equipment at the end of the lease - what about the residual value?
This is a really important consideration. The last thing you need is to find yourself stuck with an out-of-date machine that you owe money on (in the form of a residual payment) but can’t sell.
The asset finance provider you choose should be able explain how much the residual will be and what will happen to equipment you don’t want at the end of the lease term.
The answer will likely depend on the asset finance provider’s access and understanding of the secondary market for medical equipment. At Eclipx, our ownership of Australia’s largest online auction house grants us unparalleled access to a strong secondary market for all manner of medical equipment.
As a result, we have no problem selling equipment at the end of its useful life, but more importantly, we understand what the price is likely to be, and can use our knowledge to create more competitive lease terms from the beginning of the lease until the end. Because we know (better than others) what we will get for equipment at the end of the lease, we can build this into the lease payments themselves, which usually results in lower ongoing payments.
5. Have I optimised my capital structure?
This is a key question because an optimised capital structure has a direct effect on your bottom line – regardless of whether you choose to buy or lease. And this is where speaking to a specialist in financing for medical equipment is crucial.
Even if you are contemplating a medical asset with a long useful life (like a hospital bed), owning may not be the best option in every situation. You may be better to lease the bed – thereby consolidating the payments with other lease payments for equipment with a shorter lifespan, and freeing up cash for investment in your business, pursuing growth opportunities or even employing new staff.
6. Who are you dealing with - and are they flexible?
Banks are often our customers’ first port of call for medical equipment – but seldom their last. Banks, by their nature, have very strict credit approval processes and regulations, which can make them cumbersome and slow to deal with. They are usually not flexible in how they do business and often demand securities and personal guarantees from all directors and medical professionals before lending - even where those directors won't be using the equipment for instance.
Asset finance specialists, like Eclipx, can be far more flexible. One of the things that makes us radically easier to deal with is that we have the scope to approve credit on the basis of the credit profile and the experience of the medical practice and practitioner in question. Our expertise means we can form a commercial view based on relevant information and assurances, without requiring broader, more onerous, documentation.
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