Should you lease or buy equipment?

What you need to know to get the devices you need on the best terms possible.

By René Luthe, Senior Associate Editor

When it comes to distinguishing between wants and needs, ophthalmologists, like other physicians, can easily make the case that new equipment is a need. Current technology is essential to diagnose quickly and accurately, treat effectively, help patients recover faster and attract new patients — not to mention help avoid medicolegal problems. But some diagnostic devices and other equipment that packs that kind of punch does not come cheaply.

Given the economy is still bumping along somewhat and the acute impact Medicare cuts are having on ophthalmology specifically, finding the funds a practice needs to acquire new equipment requires some planning. Should you lease, or is buying actually more economical? If you opt to lease, should you accept the manufacturer’s internal financing, third-party financing or will you get better terms at your local bank?

As in so many other matters, the answer is, “It depends.”

Representatives from business and medicine offer their perspectives on how to choose the course that’s best for your practice and its balance sheet.

WHAT’S IN YOUR WALLET?

Buying equipment outright certainly sounds like the no-fuss, no-muss way to go: Write a check and the title is yours. No worries about a monthly payment or having enough money in the practice checking account to cover the payment, on top of all the other expenses.

Paying cash usually will get you a discount on the equipment. Indeed, despite the allure of leasing, Joseph Boorady, OD, senior vice president of sales and service of Carl Zeiss Meditec (Dublin, Calif.), reports that purchasing remains the option of choice. Kevin Corcoran, president of Corcoran Consulting Group, points out that while leasing offers some tax advantages from accelerated depreciation, purchasing has tax advantages as well — namely, the ability to write off the equipment, which explains why so much buying takes place at the end of the year.

Although buying outright avoids financing expense, only some doctors are in a position to afford to do so. As Mr. Corcoran notes, buying is more likely an option for well-established practices with money in the bank. Anyone not in that category may find it a stretch. For equipping satellite offices, even well-capitalized group practices may find they simply don’t have the funds to purchase two or three SD-OCTs, for example.

Thus leasing makes economic sense for a variety of practices, Mr. Corcoran explains, if for no other reason than to manage cash flow.

LEASING STRUCTURES

Should you find leasing is the best option, you’ll have to choose a lease structure. To do that, you have to ask yourself a crucial question, according to Steve Sheppard, managing principal of Medical Consulting Group: Do you want to own the equipment at the end of the lease term? If the answer is yes, paying cash up front is not your only option. Whether or not you want to own depends on how quickly the device in question wears out or becomes obsolete. Your two options:

• Capital lease, also known as a “$1 buyout lease.” At the conclusion of the lease term, you pay the lessor $1 and then you take title. From an accounting perspective (both financial and for tax purposes), Mr. Sheppard explains a capital lease is treated the same as a purchase. It goes on the practice’s books as an asset, because you are expected to own it. “You depreciate it as if you went to the bank and borrowed the money,” he says.

• Operating lease, also known as a fair-market-value lease. Under this lease structure, you don’t pay off the full cost of the equipment. Instead, you give back the equipment at the end of the lease term while it still has some residual value to the lessor.

Alternately, you could instead purchase the equipment for its fair market value. For tax and accounting purposes, Mr. Sheppard explains, you are making a rent payment each month, deducting the payment as a business expense. Because you have not incurred the risk of ownership, you don’t record the asset on your books.

WHEN TO OPT FOR A CAPITAL LEASE

If the equipment in question will last a long time and its technology won’t become obsolete quickly, Mr. Sheppard advises going for the capital lease. He cites an operating microscope as an example. “The optics and the lenses in an operating microscope are going to last probably for many years,” he says. “It’s not unusual these days to walk into operating rooms and find microscopes that have been there for eight years, 10 years, 15 years. The technology changes in operating microscopes, but the optics, probably produced 15 years ago, are still phenomenally good.”

Components that do change in operating microscopes are light sources and other ancillary elements. The only reason not to do a capital lease in this situation is because “you are cash poor and you need to stretch out the payments,” according to Mr. Sheppard.

Technology-driven devices that will quickly become outdated, such as refractive lasers or phacoemulsification systems, are better suited to an operating lease.

“You’ll want to replace things like this with new technology at the end of the lease term,” Mr. Sheppard points out — whether or not you could afford to pay cash for them. “It’s not as simple as, saying, ‘I don’t have any money so I’m going to lease,’ ” he says.

HOW TO DETERMINE THE LEASE TERM

Whether you lease or finance the purchase with a bank loan, the length of the contract depends on the “useful life” of the equipment in question, says Mr. Corcoran. “You only want to pay for the amount of useful life on the equipment you are actually using up.” Thus, he emphasizes, the lease term should always be shorter than the life of the equipment.

Here too, anticipated obsolescence is a factor. The device may last 10 years but be outdated in five, Mr. Corcoran notes, at which point you will want to replace it. Because an SD-OCT will be obsolete in five to six years, for example, he advises a lease of three to four years.

The lease-to-own option

For devices you want to own, it’s a toss-up as to whether to go to the bank or enter a capital lease, Mr. Sheppard says. Leasing typically involves higher interest rates. Physicians who don’t have an established relationship with a bank, he points out, won’t have a choice but to agree to the lease rates if they want the equipment. While that rate can be up to 3% higher than bank rates, Mr. Corcoran says, the lessee could be in for a steeper cost.

“Leasing generally involves very expensive financing that may entail a double-digit interest rate similar to credit card financing,” he says. “It’s hard to get a clear answer on this point from the lessor, but if you take the time to do the math, you learn that leasing can be expensive.”

On the other hand, manufacturers that offer internal financing rather than involving a third party may be able to offer lower interest rates as well. Read the fine print with care.

BONDING WITH THE BANK

The key phrase, though is “for physicians who don’t have an established relationship with a bank.” Banks tend to be skeptical of practices with which they have not done business previously. Having a checking account at the bank probably is not sufficient to allay the loan officer’s concerns. “At this time, as you pick up any newspaper, you’ll see that one of the problems in the United States economy is available credit for small businesses,” Mr. Corcoran points out. “Well, a doctor is a small business.”

To counter that problem, he says, physicians need to cultivate a relationship with their bank, rather than just periodically sending their practice manager to make deposits into the practice checking account. This means a face-to-face meeting with a bank officer.

When Mr. Corcoran started his business 35 years ago, he promptly scheduled such a meeting. The conversation he had, and the ones other small businesses need to have, he says, went something like this: “Okay, we want to be a good customer to you for a very long time. Here’s the way we plan to do it: Here’s our credit card business, here’s our checking account business, here’s our savings account business. PS, we need to borrow a little money. We’re not going to borrow too much, but we are going to continue to turn these loans over as we go. You’ll have a steady customer, a steady source of income — how’s that, Mr. Bank Officer?”

Assuring your bank in both word and deed that you intend to be a good customer makes a low interest rate for loans much more likely, but many physicians don’t consider this, Mr. Corcoran explains.

And keep in mind two other essentials for good terms on a bank loan: equity and capital. A bank officer wants to be certain that the loan is secured by the borrower’s capital.

With the variety of financing options available, plus putting in some quality time with your banker, you should be able to find a deal that suits both your balance sheet and your equipment needs. OM