Tag Archives: Operating Lease

Medical Equipment Finance Terminology

Finance for assets such as Medical Equipment is available in several forms, called facilities. ‘Lease’ is the term used most often, but Finance Leases and Operating Leases are not as popular in the Australian Healthcare Industry as Commercial Hire Purchase and Chattel Mortgage facilities.

Finance Leases are familiar to many as a method of buying a car. Fixed payments are made over a period of time, and at the end of the term, the payment of a ‘balloon’ (a predetermined residual value) concludes the contract and title to the asset is transferred.

Operating Leases are essentially long term rentals where the lender accepts the residual risk position and retains ownership.

Commercial Hire Purchase, also known as CHP, and Chattel Mortgage, also known as Goods Mortgage, facilities are similar to Finance Leases, but title is transferred at the start, so the tax and accounting aspects are different.

A more detailed comparison of all facilities is available on request.

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.