Equipment leasing 101
By Deb SandsFeatures Business Finance
Knowing when it makes sense to lease than own assets
Whether you are setting up your first clinic or have owned your practice for decades, you probably have similar concerns that keep you up at night.
If you recently graduated and are working as an associate you may find yourself held back as you attempt to repay loans, while only dreaming of someday opening your own clinic. If you are setting up a clinic, the ideal treatment facility you pictured in your mind may disintegrate into a far more achievable but less attractive version. And, if you already operate an established clinic, you may be looking for ways to manage your finances more efficiently, free up established lines of credit, update to the latest and most effective equipment, reduce taxes, or refresh and expand your clinic.
Bottom line: keeping your practice on a strong financial footing frees up your professional capacity to deliver the best level of care.
One of the tools successful businesses – including hospitals, dentists and chiropractors – use to streamline their business and increase profitability is equipment leasing. Companies, from single room offices to mega corporations, use leasing to facilitate operations and keep their options open.
A lease is not a loan so will not show as a liability on your financial statement. It’s a viable prescription that allows you to acquire up-to-date chiropractic equipment and office systems without tying up your cash or credit facilities. And structured properly, a lease payment is a tax-deductible benefit.
To some, the benefits of leasing may sound unrealistic. Some people have a bias toward buying or owning equipment, either because they’ve been told it’s the way to go or they have simply always done it that way. Without actually crunching the numbers to compare leasing versus buying, even professionals like accountants can sometimes find themselves giving a knee-jerk response when asked about leasing.
Leasing is a strategy, not financial voodoo. It’s an option that is replicated throughout almost every industry for all kinds of equipment from dentist chairs, tanning beds and IT to heavy-duty machinery and even ambulance equipment and supplies.
In the U.S., nearly one-third of the US$883 billion worth of equipment that companies acquire annually are obtained through leasing agreements (according to the U.S. Department of Commerce).
Let’s debunk some of the myths and arm you with competitive, cost saving strategies only leasing can give
What is Leasing AND HOW DOES IT WORK?
Leasing is paying for the exclusive right to use the equipment or asset of your choice, for a specified time. Ownership of the equipment lies with the leasing company. So you never own the equipment, unless you buy it out at the end of the lease. You can choose to allow the leasing company to take the equipment back, or buy it out – often at 10 per cent of the original purchase price.
How can leasing be more profitable than paying cash or taking a loan to buy equipment?
One of the best ways to think of this is what I refer to as the “instant profitability strategy.” When you lease any equipment that generates revenue, it can be profitable in the very first month of the contract. When you buy, most equipment will not deliver a return on your investment for one, two or even three years. Often, by the time the equipment has paid for itself, it’s time to replace it with newer technology. This can be especially true for more sophisticated technology like computers and laser equipment. Leasing “revenue-generating” equipment is a strategy you can use to realize instant profitability from when you start using your equipment, rather than after you pay the equipment off. To illustrate, consider these scenarios:
Clinic A spends $16,000 buying new office equipment, computers and software. They pay part in cash and finance the rest. This means they have depleted their line of available cash or credit by $16,000. If the equipment generates $1,000 of value or profit per month, it will take at least 16 months to pay off the equipment. On the 17th month the company starts making a profit on the equipment. By this time, it’s not long before the equipment is or will soon be off warranty, or will need replacing and Clinic A will have to repeat the
Clinic B leases the same type of new equipment. The lease payment is $750 per month. The company makes only the first payment upfront ($750). And, in the first month they generate $1,000 in value or profit from using the new equipment. Simple math: Profit $1,000 less costs $750 = $250 return on investment in the first month. They set the term of the lease to end at the same time as the warranty ends to minimize any possible repair or servicing costs. When the lease is over, Clinic B shops for and selects brand new technology. They call their leasing representative who issues a cheque to the equipment vendor for the new equipment. Clinic B takes possession of the new equipment and the leasing representative has the old equipment picke up.
What can you lease?
You can lease virtually anything you require to provide optimum care and make your practice look and feel as sophisticated as you want. What motivates clinicians to choose leasing technology over buying is that they are always able to easily upgrade from outdated or worn out equipment to the latest technology. From iPads to high-tech chiropractic tables, you can lease any asset you need to deliver better care for your patients.
When should you lease and when should you buy?
Buy assets that appreciate in value, and lease assets that depreciate. Owning equipment adds little or no value to your business. Your objective is to use equipment to make money – not to own and manage equipment. Owning equipment is not necessarily a bad thing. What’s not ideal is owning out-dated equipment that reduces your clinic’s profitability by incurring servicing costs. This can affect your profitability and your ability to provide optimum care. After a lease, if the equipment does have some remaining service life left in it, you’ll have the option of buying it out.
How will leasing save me money on my taxes?
At tax time, writing off your lease payments is a simple calculation: you can write off 100 per cent of your payments. When you own, you write off only the depreciation over a number of years and any interest you paid (get your calculator out).
How does leasing affect my available lines of credit?
Owning equipment reduces your cash flow and loaning money to buy equipment ties up your credit availability. Leasing does not tie up your line of credit. It frees it up so you can easily fund your clinic’s start up and operational expenses or deal with emergencies. Securing an equipment lease is often easier, quicker and less intrusive than securing a bank loan. Generally a credit application and perhaps a financial statement is all that’s required. And, you’ll know whether you’re
approved in about 24 hours.
How will leasing affect my cash flow?
When you pay cash, you normally take money out of your available cash reserves. Replacing equipment can stretch those valuable resources, sometimes unexpectedly. And, using older equipment can result in incurring repair and servicing costs that would be covered under warranty if the equipment was new. When you lease, you free up your cash flow so you can more comfortably cover overhead costs, hire better staff, expand, advertise or ride out slower times.
How does leasing make it easier to maintain equipment and update to the latest technology?
Leasing is a great way to always use up-to-date equipment. Lease until the warranty expires, then continue on to a new lease so you avoid paying for repairs and always have current equipment. Instead of buying and adding to your accruing debt, a competent leasing agent can guide you through the best possible options so you can get your doors open and fill your
Before you lease
- When comparing leasing companies, make sure that you are comparing apples to apples.
- Fees – Watch out for “upfront” documentation fees or end of lease “deregulation” fees. Know what they are from the beginning.
- Buyout Terms – Understand the terms and details of the buyout clause before you sign anything.
Leasing can be a financial option worth looking into the next time you see an opportunity to expand your practice or want to upgrade equipment and clinical settings that are so vital to the treatment you provide.
To learn more about equipment leasing download your free copy of my book, Equipment Leasing Guide: Essential Facts for Canadian Business at https://PriorityLeasing.net/Guide
This article originally appeared in our April 2016 issue.
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