4 reasons to finance capital equipment

Here are four reasons to finance medical equipment versus cash purchases to help deliver financial stability and flexibility for care providers.

1. Opening a new medical facility

While it’s an attractive market for investors and practitioners, the launch of a new practice is capital intensive and having a strategy for healthcare capital management should not be overlooked.

Practice leaders may not have the cash to invest in the equipment they need, or desire to maintain liquidity. Therefore, one of the benefits of long-term financing is the ability to secure all the necessary equipment assets to hit the ground running, provide care and generate revenue without breaking the bank.

With 30+ years of experience in the commercial equipment finance sector, Bonnie Lorenzini, senior director for McKesson Capital, McKesson Medical-Surgical, shares best practices gleaned from negotiating and implementing finance programs for U.S. healthcare practices of all sizes.

“When a physician office, for example, spends significant funds upfront on new equipment, it can take many years to generate enough revenue to offset that cost,” says Lorenzini. “So why not pay the expense in installments through a financing arrangement that matches up to the office’s cash flow? That way, the facility can have the equipment it needs today but pay for it over time and maintain cash reserves for other business needs.”

2. Expanding your current medical practice

A successful practice must balance investments for the future with its current financial status. It must spend money to make money but does not want to incur significant financial risk. One of the benefits of long-term financing is that a healthcare practice can fund equipment purchases without severely impacting its cash position.

“I’ve seen scenarios where a surgeon entrepreneur wants to expand his/her practice through the building of a new surgery center,” Lorenzini explains. “I’ve also worked with surgeons aspiring to extend their service line offerings at an existing site (e.g., surgery center adding orthopedic urgent care services). In both cases, the upfront equipment investment can be significant.”

3. Need to replace older equipment

Healthcare technology is constantly advancing. Equipment for diagnostics or monitoring that was advanced five years ago could now be viewed as obsolete. That’s why practices often consider a medical equipment replacement program.

This is particularly true in the laboratory space. Take for instance the unforeseen changes ushered in by the COVID-19 pandemic. Suddenly, patients needed to be tested for SARS-CoV-2 on top of typical respiratory illnesses (e.g., flu, pneumonia, strep, RSV). There’s been a tremendous opportunity for labs to expand their revenue streams, but necessary testing equipment can cost tens or even hundreds of thousands of dollars.

Financing provides a way to secure the latest technology as it hits the market for your medical equipment replacement program. In this way, facility leaders can avoid the risk of being stuck with obsolete technology that they purchased outright.

“I’ve worked with many business professionals and PhDs in science who decided to open reference labs and are underprepared for all of the capital required to outfit the lab properly,” says Lorenzini. “Recently I managed a lab financing transaction for $1.2M. The entrepreneurs starting the business were not going to pay that amount of cash out of pocket, so I secured them a loan to cover the expense.”

4. Desire to be more consumer-centric

The healthcare delivery landscape has been rapidly changing in recent years as patients assume greater control over where and how they receive care services. This drives another of the reasons to finance medical equipment.

The 2020 TransUnion Healthcare Annual Patient Survey found 80% of patients researched healthcare costs prior to receiving treatment.¹ In addition to lower costs, they want greater convenience. In a recent PwC consumer survey, one-third of patients said they would have an MRI performed at a retail venue.²

Lab tests, for example, are an area of significant opportunity for greater patient convenience and satisfaction. Traditionally, a physician practice or other care site would send lab samples off-site for processing, leaving the patient to wait hours or days for results, or even send patients to an off-site reference lab for testing.

With point-of-care (POC) diagnostic analyzers, physician practices can secure rapid, accurate test results while the patient is still in the office. This allows for immediate diagnosis and commencement of appropriate treatment right then and there, which can support improved patient satisfaction with services and clinical outcomes.

“With financing, the provider can meet patient demands for speed and convenience while paying for POC equipment over time,” Lorenzini comments. “It presents a cost-effective way for practices to meet the growing demand among patients for immediate access to health status information.”

Examples of capital financing

When considering medical equipment financing, a customer would typically secure the financing in advance of product delivery, either on their own or with the help of the vendor. However, to accommodate a changing business landscape, lenders are presenting healthcare capital management options that can be implemented after a purchase has taken place.

“When securing a quote for the purchase of new medical or lab equipment, ask your manufacturer or vendor sales reps to provide both a price for outright purchase and another one that shows a price for ‘financing,’” Lorenzini advises.

Invoiced for equipment but wants to keep cash on hand

Take for instance a scenario where a healthcare practice ordered equipment as a cash sale and then after billing decided it was better to keep the cash in the business and wanted to convert the order to financing. Lorenzini describes how she recently helped a practice navigate this challenge.

“A surgeon came to me after he had spent $300k on instrument washers/sterilizers from a manufacturer for his newly built surgery center. I was able to remove that purchase from his project financing line of credit. A lender within my network financed the order that was already paid for by paying off the surgeon’s primary bank. This allowed the surgeon to close on a much larger $5M project financing with his own bank.”

Paid cash for equipment but now requires liquid assets

Another common scenario is when a practice has contracted with a manufacturer or vendor to purchase equipment through a cash sale but hasn’t yet ordered or received the equipment. In this case, Lorenzini says she can arrange a lease where the bank is invoiced instead of the customer by arranging a finance agreement between the practice and the bank.

“In this scenario, the customer typically does either a fair market value lease (no ownership transfer at the end) or a $1 buyout lease,” Lorenzini explains. “The customer works with their equipment salesperson to configure the order and then gets lease approval before the order is placed. Once the order ships, the lender is billed, the customer accepts the start of the lease and payments begin.”

Needs some time before making first payment

An additional situation that Lorenzini commonly sees is a practice that’s purchased equipment to launch a new site or expand an existing one but anticipates that it will take some time before becoming entirely operational. In this case, she can facilitate a deferred payment arrangement, one of the benefits of long-term financing.

“A lab set up, for example, can take some time to become fully functional,” says Lorenzini. “Therefore, a 60-to 90-day deferred payment start can provide some relief before revenue is being realized.”

Examples of commonly financed equipment

• Lab instruments
• Exam tables
• Exam room furnishings
• Diagnostic equipment
• Stress systems
• Vital signs monitors
• Vision screeners
• Refrigerator/freezers
• Sterilizers
• Imaging equipment