Considering medical equipment financing for your next purchase? Here's what you need to know to avoid pitfalls and better protect your investment
It's a scenario faced by most healthcare facility leaders — how do I launch a new practice, expand an existing one or simply stay current with medical equipment while maintaining positive cash flow?
As long-standing economic pressures in the healthcare industry converge with the financial impacts of COVID-19, a growing number of facilities are looking to capital equipment financing, as opposed to depleting their cash reserves to purchase them outright.
There are many reasons financing and new options have emerged to meet a diverse set of needs. Whether you're a physician practice requiring $5,000 to upgrade its exam room equipment, a surgery center requiring $200k for sterilization equipment or a reference laboratory requiring $1.2M to upgrade or expand its operations, capital equipment financing can be a viable option for your business.
The main challenge is often the time needed to navigate through the complexities of the medical equipment financing process. The lenders, financing options and terms and conditions for medical equipment are quite different from those of a home mortgage or auto loan financing.
Practice leaders must consider factors like balancing capital expenditures with their receivables, options for preventative maintenance and repairs and aligning the life of the loan to the anticipated life of the medical capital equipment. With tight profit margins, no healthcare facility wants to pay more than needed or run the risk of being trapped in an evergreen lease that continues year-after-year, well after the equipment will likely become obsolete.
If medical equipment financing is an attractive option for your practice, there are many opportunities to secure this type of arrangement, but there are many risks as well. Failure to understand the intricacies of financing terms and conditions can lead to a practice being trapped into a financially damaging equipment finance agreement.
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 varying sizes.
Here are five key factors for consideration when pursuing an equipment finance agreement.
1 | Select the right resource: A champion for your success
Medical practice leaders need a knowledgeable, experienced and reliable advisor to help them successfully navigate the financing landscape, select a lender with favorable terms and conditions, and match them with the financial product that meets their needs today and into the future. This can be important even if you aren't sure if will you be leasing medical equipment or purchasing it through a loan.
"At McKesson, we take the time to understand the practice's needs so that we can negotiate and secure a positive financing scenario," comments Lorenzini. "Because we have such a long and successful track record in medical equipment financing, we also have leverage with lenders to request certain accommodations or flexibility in financing terms and conditions if the practice requires it."
In the case of McKesson Medical-Surgical, Lorenzini works to connect each practice with an established group of financing providers, and if none of these lenders meet their specific requirements, she conducts an extensive vetting process to find a trustworthy lender that can accommodate the desired financing scenario.
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2 | Avoid hidden traps: Financing and loan terms and conditions
There are a wide range of financing sources available — from banks to single lease brokers — and not all are credible and trustworthy. While high interest rates are an obvious pitfall, unscrupulous terms and conditions in the fine print are the driver of most problems faced by medical practices that finance equipment (e.g., interim rent and evergreen clauses).
For example, the practice may believe it's signing an equipment finance agreement for a $1 buyout lease where it can purchase the financed equipment at the end of the term. However, the leasing company may do a bait and switch to a fair market value lease, where the practice is stuck in an open-ended lease paying for the equipment indefinitely.
The right advisor can help you overcome obstacles and pave a path to financial success. It's critical to select an advisor that has deep knowledge of medical equipment and financing of this equipment, which is a distinct subset of financing. An experienced and trusted resource has worked extensively with lending providers in this area, understands what they offer, how they offer it, favorable terms and conditions and red flags to heed.
"There are so many nuances to leasing medical equipment or financing it that can easily lead practices in the wrong direction," cautions Lorenzini. "McKesson Capital know what to look for to help prevent bad outcomes and maximize the good ones."
3 | Maximize financing opportunity: Supplies and consumables
Launching a new facility or undergoing a healthcare facility expansion likely requires not only new capital equipment but also supplies/consumables. For example, a new physician practice or urgent care center requires an adequate supply of gloves, bandages, sutures, pain medication and countless other consumable items.
While an existing practice isn't likely to finance these types of purchases, a new facility or healthcare facility expansion requires such a large supply volume that it might make sense to finance some of the start-up supplies versus buying outright.
This is another reason why it's important to select an advisor that has knowledge of the healthcare industry and how practices operate. They understand that supplies are an important part of the care site equation. Lorenzini comments on her experience in this area:
"In some scenarios, I've negotiated financing agreements where up to 20% of the total value of the funding is allocated to supply purchases. We work with banks that allow that level of intangible product into the agreement."
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4 | Protect equipment assets: Warranties and maintenance agreements
While most banks don't require a practice financing medical equipment to purchase a maintenance agreement, they do require that the practice properly conduct medical equipment maintenance during the financing term. If the lease comes to an end and the bank finds that the equipment was not properly maintained, it will charge the practice for any deficiencies.
Purchasing a service agreement for financed equipment is not straightforward. A practice seeking to finance the cost of a service agreement may find that the equipment manufacturer has restrictions on lending sources and methods. Choose a financing resource that has solid relationships with medical equipment manufacturers and understands what types of medical equipment maintenance agreements they will allow financed.
In some cases, the manufacturer will allow a practice to bundle a service agreement into the financing where service payments are made monthly and interest free. In other cases, the manufacturer will sell the full multi-year service agreement upfront, which gets financed with the equipment. The downside to this upfront model is that the customer pays interest on service.
Lorenzini explains how the former example, the monthly, interest free option, works:
"The bank collects a monthly service amount with the equipment payment, and then passes it through to the manufacturer as it is received from the customer. This is called 'pass-thru service billing.' Not all manufacturers allow lenders to do this, so your leasing consultant is a key resource here to guide you through all the options."
5 | Understand financing implications: Available options
When financing, a practice should evaluate how it can leverage financial benefits at its disposal. A trusted advisor that is knowledgeable and experienced in the medical space can make recommendations on potential avenues to explore. Lorenzini describes this approach:
"Often practices don't realize that they may be able to take advantage of Section 179, which is the tax benefit for qualified capital purchases, when they have a dollar buy-out lease or loan. It can be available in certain circumstances so check with your accountant."
As the healthcare market changes and expands, medical practices need financially viable ways to acquire medical equipment now more than ever. Existing practices must keep up with technological advances to stay competitive, while maintaining positive cash flow. New practices and practices undergoing a healthcare facility expansion want to take advantage of growing demand for patient care services outside of the hospital without depleting their cash reserves.
In both cases, it's a costly endeavor for practice leaders to acquire everything they need. Financing is an ideal way to overcome the obstacle. A practice can act fast, secure funding for necessary equipment, begin generating revenue and pay for assets over time.
To do it right, the medical facility needs an advisor well versed in the field of medical equipment financing to help them successfully navigate the complexities. While the advisor does the legwork to secure financing, the practice can focus on the business of providing quality patient care.
"Having a McKesson Capital specialist available to you is a huge advantage," says Lorenzini in closing. "We can not only explain and answer questions you may have on the terms and conditions of a financing agreement, but also combine that with our team's extensive healthcare industry experience, as well as our knowledge of the medical or lab equipment you intend to acquire. Through this comprehensive approach, we will help you make a decision that best meets your clinical and business needs."
Continue your reading:
Here are four reasons to finance medical equipment versus cash purchases to help deliver financial stability and flexibility for care providers.
© 2021 McKesson Medical-Surgical Inc.