Ouch! Medical Equipment Finance Rates Trending Up

The big four banks are predicting that their average cost of funds will increase by 85 to 110 points by mid-2011. Their ‘cost of funds’ is not easily defined, but with tighter regulations on liquidity resulting from the GFC, they are now more heavily (>50%) reliant on customer deposits. The best 5-year term deposits are currently 7.3%, and the long-term wholesale funds remain volatile.

So, if you need to invest in Equipment Upgrades or additional systems within the next 12 months, now would be a good time to get a rate lock. There’s an upfront cost that increases with the length of the lock, but it’s easily justified in view of the current trend. Please note, however, that if rates turnaround, you could be subject to the lender’s need to recover what they call ‘economic cost’, which is another way of saying ‘break cost’. (We can’t have it both ways.)

The Practical Effect of RBA Rate Increases

The Reserve Bank’s rate increases don’t affect those with Finance already in place for Medical Equipment, because asset finance is based on a fixed rate over a fixed term. But, those of you who have variable or floating facilities for other needs, such as real estate, are now incurring increased costs. Capped facilities are also affected, unless the cap is low, which is unlikely. So, what is the real impact on your cash flow?

For each increase of 25 points, you’ll pay $100-200 per month more for every $1,000,000 financed. That may not seem a lot, but if you’re of the opinion that rates will continue to rise, as are most of the ‘pundits’, you may want to consider fixing now.

Operating Lease Finance for Medical Equipment

I’m a big fan of Operating Lease Finance for Medical Equipment, especially Ultrasound and Healthcare IT (i.e., PACS/RIS and Teleradiology). It’s particularly relevant for businesses that recognise the needs for regular technology upgrades and appreciate the advantages of renting as opposed to buying. Operating Leases are essentially long term (typically 3-5 years) rentals, and the advantages include lower overall cost, off-balance-sheet accounting, and multiple options during the rental period and at the end-of-term.

Lower cost is due to the lender taking a residual risk position that is more that the borrower would normally take in an alternative facility. That results in lower payments and lower total cost, because the borrower isn’t committed to a residual payment. With Operating Leases, the lender owns the asset, so it doesn’t appear in the borrower’s balance sheet. From a tax point of view, the lender claims depreciation, and the borrower deducts all payments in full as an operating expense.

Income-producing equipment can often be upgraded to further enhance cash flow. With Operating Lease Finance, you have the option to upgrade anytime during the term by simply extending the term, increasing the payments, or a combination of the two. Other facilities require the settlement of the existing loan, which can include the additional expense of break costs, and entering into a separate, new facility.

Operating Lease end-of-term options are:

  • Return the equipment/system to the lender without further obligation;
  • Extend the term with reduced payments;
  • Upgrade or replace the equipment/system with an extended term, adjusted payments, or both; or
  • Purchase the asset at the then fair market value.

The last option can be contentious unless there is a fairly active second-hand market for those types of assets.

Systems such as Ultrasound and IT have a relatively short useful life, given the rapid pace of technological improvements that enhance performance, clinical utility, or both. So, unless you have multiple practices and the ability to ‘cascade’ older systems to less busy or demanding locations, Operating Lease is the way to go.

Remember the old saying that goes something like: If an asset appreciates with time, buy it; if it depreciates, rent it.

Motor Vehicle Finance at 4.99%?

Buying a new or used car or truck can involve a significant investment of your or your company’s time and money. When it comes to financing motor vehicles, the dealerships are always keen to win your business that way, too. And, they can appear to offer rates that are much lower than any of the traditional sources of finance. But, more times than not, they’ve simply withheld discount on the purchase price to subsidise an artificially low interest rate.

So, when my wife ordered her new car recently, our strategy was to give the impression that we would pay cash so that we could get the maximum discount. (I had found a credit union offering finance for cars at home loan rates, which was about 200 points better than normal lenders.) The dealer’s final price was much better than anything available from buying agents, despite their ‘guarantees’, so we proceeded with the paperwork, which included the usual post-sale pitch for paint and rust protection. We declined, but then she asked if we would be interested in finance, indicating that the rate was under 5%!!!

Sure enough, the finance guy came around and confirmed that the rate for a three-year term was indeed 4.99%. I got a weak response to my question about how and began to think that we must have left a lot of money on the table.

But, last week I got the answer. A fellow counselor of the NSW branch of the FBAA advised me that the dealer must have access to money from the U.S., where interest rates for motor vehicles are near zero. It appears that GM is encouraging its dealers here to offer funding at about half that of traditional, local sources.