Things to consider when making decisions about investing in equipment that will support your long-term success
Now is a great time to invest in business equipment, because there are opportunities to negotiate better prices following any economic slowdown. Interest rates today are near historic lows, so it’s more affordable to borrow money today than it has been in years. This means you can save valuable investment dollars (your “working capital”) for other uses.
The timing may be right for businesses in general to be investing in new equipment – but is the timing right for you? As a health care professional, you will want to make a business case for investing in new equipment, keeping in mind some key factors.
What is your strategy for your practice? Are you happy with the services you presently offer, or would you like to provide more? Can new equipment significantly improve the experience and comfort of your patients? Can it provide new revenue opportunities?
Finding out what your peers are doing is another key consideration. Investing in new equipment now will make you more competitive in terms of the quality of care and efficiency you can deliver. Are you keeping pace with the care available to your patients elsewhere? If you fall far behind, it can be difficult to catch up and your business can suffer.
Investing in new equipment sends a very positive message to your patients. It not only shows you stay current with the latest developments and are willing to invest in improvements to better meet their needs, it also demonstrates that you have confidence in the future of your business.
An investment in computer software can make a real difference to your practice. It may not be immediately visible to patients, but they will benefit from efficiencies such as easier access to their records and the ability to bill directly to insurance companies.
How will any new equipment purchase impact your cash flow and your flexibility in managing it?
Matching your equipment needs to your financial means is crucial. It comes down to sense as well as dollars. What makes sense for your business at this stage in its lifecycle?
Some dentists may wish to meet certain performance measures, such as a target number of new patients per month, before taking on more debt. As with any business decision, health care professionals have to weigh all the considerations to determine what best suits their needs.
Determining the best use of your capital is critical. Should you buy equipment, or finance your equipment and use your capital to invest in real property as equity? What kind of cash flow do you need to generate to service your debt or leasing costs? Look at the return on your core business – your practice.
Factors to consider include: the life expectancy of the equipment and whether you want to keep it once it’s paid for; the tax treatment and how it fits with your current financial position; the payment stream; and the amount of flexibility you are looking for in early repayment.
Some health care professionals like leasing, as it allows them to try out new modes of treatment. They can test the technology’s potential without making what could be a significant and uncertain investment. In addition, a lease can sometimes be an excellent option to help maintain short-term cash reserves as there is no initial cash outlay, and repayment can often be structured to minimize monthly payments.
On the other hand, you could get into a long-term lease and realize the equipment doesn’t fit into your practice. “If you bought it instead, you’re free to sell it in the secondary market,” says Dr. Gary Stenzler, who operates dental practices in Ontario. Some health care professionals prefer to own their equipment to fully control what’s in their offices.
If you determine that leasing is your preference, there are two types of leases – capital and operating. A capital lease generally is used to finance equipment for most of its expected life span; it usually includes a pre-arranged buy-back provision, so that you can purchase the equipment when the lease expires. The capital lease option provides some control to the business as the end of term options are typically known up front. There are no “hidden” costs or negotiated values at the end of the lease term. An operating lease typically finances equipment for less than its expected useful life; at the end of the lease, the equipment can be returned without further obligation. Leases can also be structured to include maintenance, upgrades and other services.
If you decide you want to own a new piece of equipment, but don’t have the cash on hand to do so, generally the financing option is a term loan. Term loans are secured, using your existing assets as security. For dental professionals, term loans are often available for 100% of the equipment value being purchased. They typically last for up to five years, but are generally structured to match the useful life expectancy of the piece of equipment you are buying.
Whether you are looking for a lease or a loan, two options that provide great flexibility are a pre-approved lease line of credit and a revolving term loan. Similar to a pre-approved mortgage, a lease line of credit has a pre-set dollar value that enables you to act quickly whenever you find equipment that is right for your practice. A revolving term loan allows you to repay and then re-borrow up to the amount of the original term loan. This can also help you to make timely purchase decisions. Your bank will be able to help you decide what option is best for you.
It’s also important to consider tax implications when making decisions about technology and equipment. Many professionals believe that leases provide the best tax treatment. However, this is often not the case. It will depend on the equipment being purchased and the tax position of the practice.
Sometimes, owning a piece of equipment or software, and having the ability to depreciate it quickly, provides the best tax treatment. At other times, avoiding sales tax at the time of purchase and deducting the lease payment is the best route.
Whatever you decide, be sure to seek out expert advice – from your accountant, lawyer, financial advisor, bank – to ensure you’re making the best decision for your practice and your finances. The more information and advice you seek, the more informed your investment decision will be. DPM
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The contents of this article are provided for informational purposes only and are not intended to provide specific advice on your business and should not be relied upon in that regard. Not all methods described herein will be appropriate in all cases. Before implementing any strategy you should speak to an expert about your particular business and create a plan that is designed to suit your requirements.
