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.