Setting up your first general practice? Here’s what you need to think about when transitioning from doctor to small business person.
Buying medical equipment? There’s a lot to think about.
There are a lot of options available to you when it comes to financing your purchase. Ideally, you want to optimise the value of your equipment purchase and meet your cash flow requirements - without compromising long term profit.
Here are a few of the questions you should consider first:
- What is the true total cost of the equipment including expenses such as installation and delivery?
- What is the return procedure once the equipment is in use?
- What is the monthly loan repayment including all fees and charges?
- Will this investment generate a return? If so, how long will it take?
- If increasing revenue is not a major goal yet and owning the equipment will leave you in the red, should you still go ahead with the purchase?
The three main financing options explained
Generally, commercial financiers offer three product options when it comes to financing medical equipment:
The financing company owns the equipment while your business uses it and makes regular payments for a certain term. At the end of the term you may be offered the option to purchase the equipment, generally for the agreed residual value.
The financing company owns the equipment, and you progressively purchase the asset while you use it. You own the asset at the end of the term when the final payment is made.
You own the equipment, the financing company loans you the money for the purchase, and the asset is security for the loan.
As the table below demonstrates, loan types can benefit a business in different ways.
|Finance option features||Lease||Hire Purchase||Chattel Mortgage|
|Repayments are tax deductible1|
|Depreciation of the equipment is tax deductible1|
|Interest is tax deductible|
|GST is payable on the cost of the equipment|
|GST is payable on your repayments|
1If used for income producing purposes
Align the lease term
Make sure you finance your equipment over a term that matches the realistic lifespan of your equipment. Don’t make the mistake of being forced to pay for equipment years after it’s redundant. For example, it is not advisable to finance a piece of equipment over a five-year term if it has only a three-year lifespan.
Choose the right residual
A residual is the final payment due at the end of a loan agreement. This amount is set at the beginning of the loan and is included in your agreement and repayment schedule. Your residual should match the true value of your equipment at the end of its first finance period. Aim to match your residual with the second hand market value of your equipment so that you’re in a better position to negotiate a satisfactory trade-in deal. Also, ensure you factor in the effect the residual payment will have you on your practice’s cash flow.
In the table below we look at a typical example (figures used for demonstration purposes only).
|Equipment cost||Residual amount||Loan||Interest rate||Loan term||Monthly repayments||Estimated trade-In value||Balance due after loan repayment and trade-in|
|$85,000||$0||$85,000||6.75%||4 years||$1,994||$17,000||-$17,000 (You are in front!)|
|$85,000||$17,000||$85,000||6.75%||4 years||$1680||$17,000||$0 (Perfect choice)|
|$85,000||$25,500||$85,000||6.75%||4 years||$1,522||$17,000||$8,500 (Shortfall. Need to make up the difference)|
Structure your repayments to suit cash flow
Structuring a new practice or buying a practice can lead to cash flow problems. To manage this, there are a number of ways to make repayments on your loans. For instance, if standard repayments are $2000 per month over a 5-year period, you may be able to structure $500 per month for 12 or even 24 months and catch up at the end with repayments of $2700 for 3 years. Also, annual repayments in advance are available with lease finance (12 months of payments are paid upfront). Many healthcare professionals prefer to do it this way because of taxation benefits.
Any advice in this editorial has been prepared without taking into account your objectives, financial situation and needs. Before acting on this advice, you should consider its appropriateness to you and seek independent professional advice.
Medfin Australia Pty Ltd ABN 89 070 811 148, Australian Credit Licence 391697 (Medfin). For Personal Loans, Home and Residential investment loans for individuals, Medfin is a credit provider, as agent for National Australia Bank Limited ABN 12 004 044 937, AFSL and Australian Credit Licence Number 230686 (NAB). Medfin is a wholly owned subsidiary of NAB and part of the NAB Health specialist business.