To Lease or Not To Lease? That is the Question!
When it comes to equipping a medical practice, there are endless things to consider. Modern technology is so rapidly-changing, that it can seem like a bad investment to purchase anything except office furniture and exam tables!
Recently, I helped draw up a business plan regarding the purchase of an MRI machine. I calculated the net income, and how many patients we outsourced, and also how payments from insurance companies might factor into the equation. In the end, it made business sense, but the variables were tricky.
Some lease agreements are good bargains. For instance, there's the "buck-out" clause, which allows the practice to buy a piece of equipment for $1 after the lease runs out. This can be a good way to get a good deal and keep an item properly updated throughout the terms of the lease.
Here are some good rules of thumb regarding negotiating an equipment lease:
- Can you transfer it? This is important not only in case you sell your practice midway through the term, but also if you bring on other partners who will share in the liabilities and assets.
- Will it automatically renew? Some leasing companies insert an "evergreen" clause into contracts. This is a time period prior to the end of the term when the customer has to notify them of their intent regarding the equipment. If this clause is in effect, and the customer neglects to notify the company in time, the lease automatically renews for another period.
- Be clear on the end costs. A leasing company will usually have a provision giving them permission to charge you for damage or unexpected depreciation on the equipment. Be sure to get specifics on this beforehand, so there will be no misunderstandings at the conclusion of the lease.
- Avoid indeminfication clauses. A lease company will try to protect itself from lawsuits by including such a clause, making the practice liable should a patient sue the company due to an injury caused by their leased equipment. Never allow this in your contract!
- What are the tax benefits? Some states allow you to claim depreciation from leased equipment. Ask your accountant if yours does.
- Who will do the equipment maintenance? Be clear on what maintenance the vendor is willing to do on the machine. Will they repair all of the components? Again, get as specific as possible.
It always pays to negotiate. Dare to ask, and see what happens. If you can, wait until you're near the end of the company's fiscal year, when they're more ready to cut a deal. After all, a lease is a long-term commitment with nasty penalties for getting out early (if they let you).
I've tried to cover a lot of the bases here, but I'd love to know any other tips you'd care to share. Would you rather buy or lease? Any horror stories or things to avoid? As always, your comments are welcome!
posted by Anne @ 7:32 AM
2 comments
2 Comments:
In 9 out of 10 cases, if the practice can afford to buy the machine, the practice will save money instead of leasing.
Leasing companies will usually add a min. of 3% higher interest rate. If you can get a fixed asset loan from your bank ( approx 7%) it is much better than the current lease rates of 11 to 12 %. This is equivalent to the $1 buyout. If technology has changed you can always try and get a little credit for the used / old machine from the vendor when buying a newew replacement.
In the worst scenario, the fvendor will remove it off your site without any charges !!
Even the 10% or residual value lease is normally not worth it. If you factor in the additional higher interest that you paid, you have paid a much higher price already.
Sometimes, you can get a tax break from Uncle Sam if you send the used old machine to a Underdeveloped country at the same time helping a poor country / population !!
A monthly lease payment is usually a 100% write-off as an expense, where as if you get aloan from the bank and buy the product, it has to be depreciated over a # of years ( depending on the type of product - Electronic products like computers etc can be written off in 3 yrs)
The only time I think a lease is beneficial is when leasing cars for company executives - this is to give a perk to them of having new cars every couple of years !! Financially it does not make sense !!
I agree about buying outright. Leases are offered because obviously the one doing the lease is making money.
The Section 179 deduction for equipment is fairly liberal these days, so most of our equipment purchases are deductible in the first year.
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