In an economy filled with companies vying for your business, you face many financing options when your practice needs equipment. The two most common options for acquiring equipment are leasing and buying. There are advantages to either option — or a combination of the two. As a consumer and a business owner, how are you to know the best option for your individual and business needs? By following some general guidelines, you can assure you’re making the decision that’s right for you.
The decision to lease or buy will depend somewhat on your personal situation. Are you a recent graduate with student loans to pay off? Do you have bad credit or cash flow problems? Do you need a co-signer?
If you’re building a new practice and have student loans to pay, cash flow difficulties, bad credit, or if you cannot get a co-signer, then leasing’s lower payments and cash-flow savings may be more feasible. If you already have capital and credit available, and are trying to take an established practice to the next level, then other factors should be taken into consideration.
Is the equipment needed for the long term or short term? When today’s equipment is likely to meet long-term needs, purchasing is often the most cost-effective acquisition choice. If, however, your needs are likely to change within the next few years, leasing may be the smarter alternative. Leasing allows you to acquire the equipment you need today and use it cost-effectively until it no longer meets your needs, then upgrade without dealing with the outdated and obsolete.
Several other factors to consider are: Technologically speaking, what is the lifespan of the equipment? What is the cost of the equipment? If the equipment will be needed for more than five years and from a technology standpoint will still be useful, you probably want to purchase. If you do not have 100% of the capital available to purchase, a bank loan may be a feasible alternative if you have acceptable credit. A bank loan rate is usually much lower than a lease rate. Depending on your credit, banks usually offer rates a few points above prime rate. Leasing rates are usually 3% to 10% higher than bank rates, and some are as high as 17% to 21%.
You can compare rates from the convenience of your computer. Although there are many websites designed for loan rate comparisons, one in particular that you may find helpful is bankrate.com.
Buying also offers tax advantages and purchase warranties for equipment repairs or replacement. Also, when you purchase equipment, there is an $18,000 deduction that can be taken (section 179 of the tax code) that is not available with leasing. Another consideration: Most equipment depreciates for tax purposes in five to seven years if you do not take the Section 179 deduction.
If you have decided that leasing is the most attractive option, you need to be aware that not all leases are equal. There are two types of leases to consider: the operating lease and the finance or capital lease. The operating lease runs for a portion of the equipment’s useful life, generally a shorter-term than the capital lease. Operating leases often include maintenance and insurance for high-tech and quickly obsolete equipment.
The leasing company owns the equipment, and takes the depreciation deduction. As the lessee, you have no liability except for the payments. For tax purposes, you can deduct these payments from operating revenues as an operating expense, not a capital investment.
A finance or capital lease is a full-payment or closed-end lease with varying terms. At its conclusion you can purchase the equipment at a bargain price, usually a fraction of the original value. Designed for longer periods than an operating lease, it is similar to an installment sales contract.
Remember, however, that short-term savings may result in higher costs over the entire leasing period, especially with a finance lease that has a purchase option at lease end. You may pay more in the long run, so determine any end-of-lease costs beforehand.
Many lease terms include insurance, maintenance, taxes and a variety of asset management services. Some lessors include service but with others, you must negotiate for the service level you want. There are no quick fixes in making the decision to lease, buy, or use a combination of the two.
If you do decide to lease rather than buy, the checklist below can be used as a general guideline:
- Shop around. Although this is true with any major purchase, some people still fail to do the necessary research. With all the information available over the World Wide Web today, it is much easier to shop around and compare rates. One good source for various leasing companies is bworks.com/funding (www.bworks.com/funding/). There are also many other websites that list leasing companies. From there, you can do your due diligence by calling and comparing pertinent information. You may also want to consider a financing company that specializes in working with chiropractors.
- Perform a lease analysis. After you have narrowed your choice down to a few different companies, complete a lease analysis. Many of the leasing companies will provide this, or you can do it yourself. There are many websites that allow you to download free of charge a buy vs. lease analysis program. Many of these sites can be found simply by typing, “buy vs. lease” into your favorite web browser/ search engine. Be sure to review the terms and evaluate the leasing company. You may want to ask a financial services professional, accountant or tax lawyer to review the lease as well.
- Consider several manufacturers. If you’re dealing with a leasing company or equipment distributor, ask for rates and terms from several manufacturers. This makes the process competitive. Yes, you can choose whom the equipment/supplies are bought from and then choose the most favorable price.
- Negotiate the price. Contact the leasing company that you want to purchase the equipment from and give them the manufacturer information. This allows you to choose the most favorable price, rather than pay a total sales cost that the leasing company has negotiated with its choice manufacturer.
- Maintain a competitive atmosphere during all lease negotiations. This motivates lessors to offer their most favorable terms. Let all the leasing companies you have talked to know that you are “discussing options” with other leasing companies. However, do not provide details or company names. Bringing up the subject, without giving further details, is all that’s needed to create the competitive atmosphere.
- If possible, sign your agreement as a corporate representative, not an individual. If the corporation goes bankrupt, you’re not personally responsible for the payments. Make sure you do not also sign as the guarantor, or this, of course, will not apply. Also, when signing the agreement, place your title to the right of your signature.
If you are not sure whether buying or leasing is your best option, always contact a financial services professional, accountant or attorney. Although you’ll be charged for the advice, you could end up saving hundreds, if not thousands, of dollars in the long run.
The decision to lease vs. buy is as unique to every situation as is your personality. Always do your homework, because your decision can cost or save you a lot of money.