It’s a great time to practice medicine, and the cosmetic market continues to thrive! We’ve never before had such opportunity to provide cosmetic services and procedures. More and more patients demand non-surgical cosmetic procedures, such as fillers, toxins and lasers. There is no question that adding cosmetic procedures will positively affect your bottom line. However, the cost of acquiring the equipment necessary to provide cosmetic services such as lasers can sometimes be daunting. How can you pay for a laser that costs upward of $100,000 if you do not have the foresight to purchase a winning lottery ticket? Really, there are two options available: leasing or purchasing the equipment.
Lease or Buy?
The question seems easy enough. After all, anyone who has purchased a car or rented an apartment has performed his own “rent or buy” analysis. However, in the case of making an equipment purchase for your practice, the analysis is a bit different. There’s not necessarily a right or wrong answer — just one that is better for your practice.
You need to analyze both the straightforward economic considerations as well as the more complex non-economic considerations, such as your comfort level with owning versus leasing and life expectancy of the product.
In analyzing the buy-or-lease decision, it is helpful to keep in mind the goal of the analysis and determine the difference between the revenue generated by the equipment and the cost of using the equipment (i.e., lease payments or loan payments and incremental labor cost). The difference represents cash flow to your practice.
Economic Considerations
Although not exact, the following framework is a good starting place to perform the economic analysis of a lease or purchase decision. The analysis produces a qualitative result (i.e., whether it is better to lease or buy). For quantitative analysis (i.e., how much better it is to lease or buy), you should consult with your financial advisor.
First, analyze the economic affect of leasing: Add all cash outflows due under the lease. Cash outflows would include any transaction fees or closing costs and purchase options in the case of a fair market value lease.
Next, subtract the residual value of the equipment. In the case of an operating lease, the residual value would be $0.
Compare this result to the economic affect of purchasing: Add all cash outflows due under the loan. Cash outflows would include origination fees, other transaction costs and principal and interest.
Next, subtract the residual value of the equipment. The analysis that produces the lower number will offer the best economic result.
Non-economic Considerations
The factors that make the lease or buy analysis so difficult are the noneconomic factors. These factors are difficult to quantify and some even carry emotional baggage, which make them even more troublesome. For example, are you more comfortable as a renter or an owner? Of course, your “feelings” should not be a factor in making an important business decision, but they are.
Certainly, important factors to consider are obsolescence and life expectancy. If the equipment has a short lifespan or is in danger of technological obsolescence, you probably do not want to own it.
Another important consideration is the future of your practice. Do you plan to sell your practice in the near future? What if you take on additional partners? If the financing documents do not allow for assignment, or have a due-on-transfer clause, you may be in the unenviable position of paying off the obligation in full at an inopportune time in the future.
Tax Considerations
The qualitative analysis holds only if the tax consequences to leasing or buying the equipment have the same tax consequences. Fortunately, the allowance under section 179 of the Internal Revenue Code coupled with the 30% “bonus” depreciation (enacted by Congress in 2002) under section 168 usually negates any tax difference between leasing and buying.
Leasing Options: An Overview
If your analyses lead you to see that leasing is your best option, here are some things you should know. It is important to keep in mind that leasing is simply a financial tool to acquire the equipment so you may use it for the benefit of your patients. Leases come in three basic forms: operating leases, fair market value lease and capital leases.
An operating lease is basically a rental agreement between your practice and the finance company. You agree to pay the finance company a sum certain each month, and the finance company allows you to use the equipment. At the termination of the lease, you return the equipment to the leasing company. An operating lease may be a good choice when there is a concern about technological obsolescence (note, technological obsolescence is a non-economic consideration).
Similar to the operating lease is the fair market value lease. The difference between the two is that the lessee (you) is given the right to purchase the equipment at the termination of the lease at a price to be determined now. The right to purchase the equipment can be either optional (you chose whether to purchase the equipment at the termination of the lease) or mandatory (you are required to purchase the equipment at the termination of the lease). With a fair market value lease with a mandatory purchase right, you can effectively minimize your monthly payments by maximizing your purchase option. This lease may be a good choice if you are cash poor, but expect your income to increase in the future.
Finally, there is the capital lease. With a capital lease, the lessee (you) pays a sum certain each month over the expected useful life of the equipment. At the termination of the lease, the lessee has the right to purchase the equipment for a nominal sum. Legally, a capital lease is indeed a lease; however, for tax and accounting purposes, a capital lease is treated as a purchase. As a purchase, the equipment must be capitalized and depreciated over its useful life. This type of lease is the closest to an outright purchase, and is a good choice if the total payments under the lease are less than the total payments on an outright purchase.
Leasing companies and manufacturers typically provide all three types of financing. The equipment leasing business is very competitive and many companies (including your local bank) compete for your business. While this competition is great for the consumer, the leasing companies attempt to differentiate their products from the competition by offering slightly different terms and conditions. Thus, an apples-to-apples comparison can be difficult.
Borrowing From Your Bank
The foregoing analysis may lead you to the conclusion that the best decision is to purchase the equipment with borrowed money. If so, you will likely get the lowest interest rate and the best terms by borrowing from your bank. Unfortunately, borrowing from your bank may be easier said than done. The old bromide goes something like “banks will loan you all the money that you can prove you do not need.”
So, if you do not want to pledge your home as collateral, and if you would like to avoid joint and several liability (which means that if you and your partners borrow from the bank, then the bank can hold any one of you responsible for the entire loan), then you will have to do some planning and nurturing of your banking relationship. Here are a few tips.
1. Every year sit down with your banker and your accountant to review your financial statements. You should plan to do this over lunch, in which case the banker should pick up the tab. If the CPA picks up the tab, you’re likely to be billed for that as a non-descript “cost advanced” on your next invoice.
2. If you normally keep your books by the cash method, you ought to consider preparing them according to the accrual method once a year for the sake of your banker. With the accrual method, you count income when you perform a service and expense when you incur it, as opposed to when you receive payment or pay an invoice. This translates your financial data into the banker’s language. You should also give him an aged accounts receivable report.
3. Bankers love to see retained earnings on your financial statements. If, for example you have $5 in your account, your banker will be inclined to lend you, say, $50 more. Unfortunately, however, most groups choose not to retain earnings in order to avoid paying taxes on money squirreled away. In a professional corporation, those funds would be taxed at 35%, which may be higher than most doctors’ individual rates. An alternative to retaining earnings is for one or more doctors to loan the practice money at a fair interest rate. That loan looks like equity on the books.
4. You can also improve the looks of your financial statements by taking a pay cut. By taking less cash out of the company, you increase retained earnings. The goal is to leverage the tithed income as you would an internal loan. You take the pay-cut agreement to the bank and say, “Look, this will raise $3 million over 5 years, so give us a $3 million line of credit.”
Your efforts to win better loan terms, however, will be for naught if you do not give the bank a solid business plan for the use of the new equipment. Your business plan need not be in writing; however, you should have very good answers to the following questions:
- What will be your annual cost once you factor in maintenance, supplies, personnel, and building alterations?
- How much patient volume will you need to break even?
- How will you market the service to patients and referring physicians in order to achieve that volume?
- Will health plans pay for the new service?
If you are intent on borrowing a large amount, such as $500,000, solicit formal bids from your current bank as well as competitors. Also, ask them to bid on everyday banking services such as checking and credit card processing because financial service providers are likely to give you a better interest rate if you use many services.
Weighing the Options
The analysis used to determine whether you should lease or purchase new equipment is not as daunting as it may seem. The analysis is really little more than weighing the economic and non-economic considerations.
The difficulty comes from the fact that the non-economic considerations can be fundamentally different than the economic considerations, which makes weighing the two troublesome. In spite of these difficulties, however, the decision to add new equipment to your practice is an exciting one that can add substantially to your bottom line.
It’s a great time to practice medicine, and the cosmetic market continues to thrive! We’ve never before had such opportunity to provide cosmetic services and procedures. More and more patients demand non-surgical cosmetic procedures, such as fillers, toxins and lasers. There is no question that adding cosmetic procedures will positively affect your bottom line. However, the cost of acquiring the equipment necessary to provide cosmetic services such as lasers can sometimes be daunting. How can you pay for a laser that costs upward of $100,000 if you do not have the foresight to purchase a winning lottery ticket? Really, there are two options available: leasing or purchasing the equipment.
Lease or Buy?
The question seems easy enough. After all, anyone who has purchased a car or rented an apartment has performed his own “rent or buy” analysis. However, in the case of making an equipment purchase for your practice, the analysis is a bit different. There’s not necessarily a right or wrong answer — just one that is better for your practice.
You need to analyze both the straightforward economic considerations as well as the more complex non-economic considerations, such as your comfort level with owning versus leasing and life expectancy of the product.
In analyzing the buy-or-lease decision, it is helpful to keep in mind the goal of the analysis and determine the difference between the revenue generated by the equipment and the cost of using the equipment (i.e., lease payments or loan payments and incremental labor cost). The difference represents cash flow to your practice.
Economic Considerations
Although not exact, the following framework is a good starting place to perform the economic analysis of a lease or purchase decision. The analysis produces a qualitative result (i.e., whether it is better to lease or buy). For quantitative analysis (i.e., how much better it is to lease or buy), you should consult with your financial advisor.
First, analyze the economic affect of leasing: Add all cash outflows due under the lease. Cash outflows would include any transaction fees or closing costs and purchase options in the case of a fair market value lease.
Next, subtract the residual value of the equipment. In the case of an operating lease, the residual value would be $0.
Compare this result to the economic affect of purchasing: Add all cash outflows due under the loan. Cash outflows would include origination fees, other transaction costs and principal and interest.
Next, subtract the residual value of the equipment. The analysis that produces the lower number will offer the best economic result.
Non-economic Considerations
The factors that make the lease or buy analysis so difficult are the noneconomic factors. These factors are difficult to quantify and some even carry emotional baggage, which make them even more troublesome. For example, are you more comfortable as a renter or an owner? Of course, your “feelings” should not be a factor in making an important business decision, but they are.
Certainly, important factors to consider are obsolescence and life expectancy. If the equipment has a short lifespan or is in danger of technological obsolescence, you probably do not want to own it.
Another important consideration is the future of your practice. Do you plan to sell your practice in the near future? What if you take on additional partners? If the financing documents do not allow for assignment, or have a due-on-transfer clause, you may be in the unenviable position of paying off the obligation in full at an inopportune time in the future.
Tax Considerations
The qualitative analysis holds only if the tax consequences to leasing or buying the equipment have the same tax consequences. Fortunately, the allowance under section 179 of the Internal Revenue Code coupled with the 30% “bonus” depreciation (enacted by Congress in 2002) under section 168 usually negates any tax difference between leasing and buying.
Leasing Options: An Overview
If your analyses lead you to see that leasing is your best option, here are some things you should know. It is important to keep in mind that leasing is simply a financial tool to acquire the equipment so you may use it for the benefit of your patients. Leases come in three basic forms: operating leases, fair market value lease and capital leases.
An operating lease is basically a rental agreement between your practice and the finance company. You agree to pay the finance company a sum certain each month, and the finance company allows you to use the equipment. At the termination of the lease, you return the equipment to the leasing company. An operating lease may be a good choice when there is a concern about technological obsolescence (note, technological obsolescence is a non-economic consideration).
Similar to the operating lease is the fair market value lease. The difference between the two is that the lessee (you) is given the right to purchase the equipment at the termination of the lease at a price to be determined now. The right to purchase the equipment can be either optional (you chose whether to purchase the equipment at the termination of the lease) or mandatory (you are required to purchase the equipment at the termination of the lease). With a fair market value lease with a mandatory purchase right, you can effectively minimize your monthly payments by maximizing your purchase option. This lease may be a good choice if you are cash poor, but expect your income to increase in the future.
Finally, there is the capital lease. With a capital lease, the lessee (you) pays a sum certain each month over the expected useful life of the equipment. At the termination of the lease, the lessee has the right to purchase the equipment for a nominal sum. Legally, a capital lease is indeed a lease; however, for tax and accounting purposes, a capital lease is treated as a purchase. As a purchase, the equipment must be capitalized and depreciated over its useful life. This type of lease is the closest to an outright purchase, and is a good choice if the total payments under the lease are less than the total payments on an outright purchase.
Leasing companies and manufacturers typically provide all three types of financing. The equipment leasing business is very competitive and many companies (including your local bank) compete for your business. While this competition is great for the consumer, the leasing companies attempt to differentiate their products from the competition by offering slightly different terms and conditions. Thus, an apples-to-apples comparison can be difficult.
Borrowing From Your Bank
The foregoing analysis may lead you to the conclusion that the best decision is to purchase the equipment with borrowed money. If so, you will likely get the lowest interest rate and the best terms by borrowing from your bank. Unfortunately, borrowing from your bank may be easier said than done. The old bromide goes something like “banks will loan you all the money that you can prove you do not need.”
So, if you do not want to pledge your home as collateral, and if you would like to avoid joint and several liability (which means that if you and your partners borrow from the bank, then the bank can hold any one of you responsible for the entire loan), then you will have to do some planning and nurturing of your banking relationship. Here are a few tips.
1. Every year sit down with your banker and your accountant to review your financial statements. You should plan to do this over lunch, in which case the banker should pick up the tab. If the CPA picks up the tab, you’re likely to be billed for that as a non-descript “cost advanced” on your next invoice.
2. If you normally keep your books by the cash method, you ought to consider preparing them according to the accrual method once a year for the sake of your banker. With the accrual method, you count income when you perform a service and expense when you incur it, as opposed to when you receive payment or pay an invoice. This translates your financial data into the banker’s language. You should also give him an aged accounts receivable report.
3. Bankers love to see retained earnings on your financial statements. If, for example you have $5 in your account, your banker will be inclined to lend you, say, $50 more. Unfortunately, however, most groups choose not to retain earnings in order to avoid paying taxes on money squirreled away. In a professional corporation, those funds would be taxed at 35%, which may be higher than most doctors’ individual rates. An alternative to retaining earnings is for one or more doctors to loan the practice money at a fair interest rate. That loan looks like equity on the books.
4. You can also improve the looks of your financial statements by taking a pay cut. By taking less cash out of the company, you increase retained earnings. The goal is to leverage the tithed income as you would an internal loan. You take the pay-cut agreement to the bank and say, “Look, this will raise $3 million over 5 years, so give us a $3 million line of credit.”
Your efforts to win better loan terms, however, will be for naught if you do not give the bank a solid business plan for the use of the new equipment. Your business plan need not be in writing; however, you should have very good answers to the following questions:
- What will be your annual cost once you factor in maintenance, supplies, personnel, and building alterations?
- How much patient volume will you need to break even?
- How will you market the service to patients and referring physicians in order to achieve that volume?
- Will health plans pay for the new service?
If you are intent on borrowing a large amount, such as $500,000, solicit formal bids from your current bank as well as competitors. Also, ask them to bid on everyday banking services such as checking and credit card processing because financial service providers are likely to give you a better interest rate if you use many services.
Weighing the Options
The analysis used to determine whether you should lease or purchase new equipment is not as daunting as it may seem. The analysis is really little more than weighing the economic and non-economic considerations.
The difficulty comes from the fact that the non-economic considerations can be fundamentally different than the economic considerations, which makes weighing the two troublesome. In spite of these difficulties, however, the decision to add new equipment to your practice is an exciting one that can add substantially to your bottom line.
It’s a great time to practice medicine, and the cosmetic market continues to thrive! We’ve never before had such opportunity to provide cosmetic services and procedures. More and more patients demand non-surgical cosmetic procedures, such as fillers, toxins and lasers. There is no question that adding cosmetic procedures will positively affect your bottom line. However, the cost of acquiring the equipment necessary to provide cosmetic services such as lasers can sometimes be daunting. How can you pay for a laser that costs upward of $100,000 if you do not have the foresight to purchase a winning lottery ticket? Really, there are two options available: leasing or purchasing the equipment.
Lease or Buy?
The question seems easy enough. After all, anyone who has purchased a car or rented an apartment has performed his own “rent or buy” analysis. However, in the case of making an equipment purchase for your practice, the analysis is a bit different. There’s not necessarily a right or wrong answer — just one that is better for your practice.
You need to analyze both the straightforward economic considerations as well as the more complex non-economic considerations, such as your comfort level with owning versus leasing and life expectancy of the product.
In analyzing the buy-or-lease decision, it is helpful to keep in mind the goal of the analysis and determine the difference between the revenue generated by the equipment and the cost of using the equipment (i.e., lease payments or loan payments and incremental labor cost). The difference represents cash flow to your practice.
Economic Considerations
Although not exact, the following framework is a good starting place to perform the economic analysis of a lease or purchase decision. The analysis produces a qualitative result (i.e., whether it is better to lease or buy). For quantitative analysis (i.e., how much better it is to lease or buy), you should consult with your financial advisor.
First, analyze the economic affect of leasing: Add all cash outflows due under the lease. Cash outflows would include any transaction fees or closing costs and purchase options in the case of a fair market value lease.
Next, subtract the residual value of the equipment. In the case of an operating lease, the residual value would be $0.
Compare this result to the economic affect of purchasing: Add all cash outflows due under the loan. Cash outflows would include origination fees, other transaction costs and principal and interest.
Next, subtract the residual value of the equipment. The analysis that produces the lower number will offer the best economic result.
Non-economic Considerations
The factors that make the lease or buy analysis so difficult are the noneconomic factors. These factors are difficult to quantify and some even carry emotional baggage, which make them even more troublesome. For example, are you more comfortable as a renter or an owner? Of course, your “feelings” should not be a factor in making an important business decision, but they are.
Certainly, important factors to consider are obsolescence and life expectancy. If the equipment has a short lifespan or is in danger of technological obsolescence, you probably do not want to own it.
Another important consideration is the future of your practice. Do you plan to sell your practice in the near future? What if you take on additional partners? If the financing documents do not allow for assignment, or have a due-on-transfer clause, you may be in the unenviable position of paying off the obligation in full at an inopportune time in the future.
Tax Considerations
The qualitative analysis holds only if the tax consequences to leasing or buying the equipment have the same tax consequences. Fortunately, the allowance under section 179 of the Internal Revenue Code coupled with the 30% “bonus” depreciation (enacted by Congress in 2002) under section 168 usually negates any tax difference between leasing and buying.
Leasing Options: An Overview
If your analyses lead you to see that leasing is your best option, here are some things you should know. It is important to keep in mind that leasing is simply a financial tool to acquire the equipment so you may use it for the benefit of your patients. Leases come in three basic forms: operating leases, fair market value lease and capital leases.
An operating lease is basically a rental agreement between your practice and the finance company. You agree to pay the finance company a sum certain each month, and the finance company allows you to use the equipment. At the termination of the lease, you return the equipment to the leasing company. An operating lease may be a good choice when there is a concern about technological obsolescence (note, technological obsolescence is a non-economic consideration).
Similar to the operating lease is the fair market value lease. The difference between the two is that the lessee (you) is given the right to purchase the equipment at the termination of the lease at a price to be determined now. The right to purchase the equipment can be either optional (you chose whether to purchase the equipment at the termination of the lease) or mandatory (you are required to purchase the equipment at the termination of the lease). With a fair market value lease with a mandatory purchase right, you can effectively minimize your monthly payments by maximizing your purchase option. This lease may be a good choice if you are cash poor, but expect your income to increase in the future.
Finally, there is the capital lease. With a capital lease, the lessee (you) pays a sum certain each month over the expected useful life of the equipment. At the termination of the lease, the lessee has the right to purchase the equipment for a nominal sum. Legally, a capital lease is indeed a lease; however, for tax and accounting purposes, a capital lease is treated as a purchase. As a purchase, the equipment must be capitalized and depreciated over its useful life. This type of lease is the closest to an outright purchase, and is a good choice if the total payments under the lease are less than the total payments on an outright purchase.
Leasing companies and manufacturers typically provide all three types of financing. The equipment leasing business is very competitive and many companies (including your local bank) compete for your business. While this competition is great for the consumer, the leasing companies attempt to differentiate their products from the competition by offering slightly different terms and conditions. Thus, an apples-to-apples comparison can be difficult.
Borrowing From Your Bank
The foregoing analysis may lead you to the conclusion that the best decision is to purchase the equipment with borrowed money. If so, you will likely get the lowest interest rate and the best terms by borrowing from your bank. Unfortunately, borrowing from your bank may be easier said than done. The old bromide goes something like “banks will loan you all the money that you can prove you do not need.”
So, if you do not want to pledge your home as collateral, and if you would like to avoid joint and several liability (which means that if you and your partners borrow from the bank, then the bank can hold any one of you responsible for the entire loan), then you will have to do some planning and nurturing of your banking relationship. Here are a few tips.
1. Every year sit down with your banker and your accountant to review your financial statements. You should plan to do this over lunch, in which case the banker should pick up the tab. If the CPA picks up the tab, you’re likely to be billed for that as a non-descript “cost advanced” on your next invoice.
2. If you normally keep your books by the cash method, you ought to consider preparing them according to the accrual method once a year for the sake of your banker. With the accrual method, you count income when you perform a service and expense when you incur it, as opposed to when you receive payment or pay an invoice. This translates your financial data into the banker’s language. You should also give him an aged accounts receivable report.
3. Bankers love to see retained earnings on your financial statements. If, for example you have $5 in your account, your banker will be inclined to lend you, say, $50 more. Unfortunately, however, most groups choose not to retain earnings in order to avoid paying taxes on money squirreled away. In a professional corporation, those funds would be taxed at 35%, which may be higher than most doctors’ individual rates. An alternative to retaining earnings is for one or more doctors to loan the practice money at a fair interest rate. That loan looks like equity on the books.
4. You can also improve the looks of your financial statements by taking a pay cut. By taking less cash out of the company, you increase retained earnings. The goal is to leverage the tithed income as you would an internal loan. You take the pay-cut agreement to the bank and say, “Look, this will raise $3 million over 5 years, so give us a $3 million line of credit.”
Your efforts to win better loan terms, however, will be for naught if you do not give the bank a solid business plan for the use of the new equipment. Your business plan need not be in writing; however, you should have very good answers to the following questions:
- What will be your annual cost once you factor in maintenance, supplies, personnel, and building alterations?
- How much patient volume will you need to break even?
- How will you market the service to patients and referring physicians in order to achieve that volume?
- Will health plans pay for the new service?
If you are intent on borrowing a large amount, such as $500,000, solicit formal bids from your current bank as well as competitors. Also, ask them to bid on everyday banking services such as checking and credit card processing because financial service providers are likely to give you a better interest rate if you use many services.
Weighing the Options
The analysis used to determine whether you should lease or purchase new equipment is not as daunting as it may seem. The analysis is really little more than weighing the economic and non-economic considerations.
The difficulty comes from the fact that the non-economic considerations can be fundamentally different than the economic considerations, which makes weighing the two troublesome. In spite of these difficulties, however, the decision to add new equipment to your practice is an exciting one that can add substantially to your bottom line.
