Cash or credit?
Borrowing money for an equipment purchase requires doing a bit of research to find the right lending partner.
Any successful veterinary practice needs the right equipment in place, whether that means outfitting a start-up operation, adding a surgical suite or simply replacing a tired X-ray machine with a state-of-the-art model. Researching all the particulars can become a lengthy process as team members make sure they select the right piece of equipment for the right job at the right time.
For too many practices, however, the homework ends there. What veterinarians, practice managers and other procurement people aren’t always as knowledgeable about are the financing options that will help make the best decision in support of the bottom line.
Flush with Cash?
Borrowing money to buy equipment is understandable if you don’t have a large cash reserve. But what if you can pay in full? Obviously, you’ll avoid the costs associated with a loan, but that might not be your best strategy.
Although loan payments are not tax deductible, depreciation and interest often are. Accelerated depreciation methods, such as Section 179, allow you to take up to 100 percent of the depreciation in the year you purchase the equipment.
And there’s something to be said about keeping the cash stash intact in case of an emergency or investment opportunity. Before deciding, ask your accountant about cash-flow considerations and whether deductions might prove beneficial for your practice.
When Is a Lease Not a Lease?
When it comes to financing an equipment purchase, it is important to first understand the terminology. Traditional lenders in the equipment arena often use the term “lease” instead of “loan.” However, this doesn’t mean you rent the equipment for a designated period and never take ownership, which is known as an operating lease. Rather, they are referring to a finance, or capital, lease.
“These leases require no money down, which enables practices to immediately get a return on their investment,” said Scott Preiser, general manager of equipment finance at Live Oak Bank.
“Seventy-five percent of all our business is through these capital leases, which have a $1 purchase option at the end of the lease.
The bank purchases the equipment and holds the title until the lease ends and the dollar is paid.
Equipment finance agreements are essentially the same as capital leases but have additional liability protection for the lessor.
Choosing the Best Partner
An equipment sales representative no doubt will have recommendations for lenders found to be reputable and reliable. (Your options might be limited if you are purchasing used or highly specialized equipment).
If you’ve already established a positive relationship with a lender, don’t hesitate to insist on partnering with them again. But if this is your first foray into lending, look beyond the interest rate offered and take a close look at the services and support each lender offers, as well as its longevity and reputation. Consult other practices, trade associations and professional organizations about their experiences.
Consider asking these questions of your prospective lender:
- How long have you been working in the veterinary industry?
- What veterinary expertise does your organization bring to the table?
- Why should I work with you instead of another lender?
- How can you support my practice’s needs beyond this purchase?
- Can you also address my personal banking needs to allow for one-stop shopping?
George Bednar, vice president and director of sales at Beneficial Equipment Finance Corp., has worked over 30 years in the equipment finance industry, nearly half of that in the veterinary market.
“I’ve directly or indirectly done business with 35 to 40 percent of practices,” Bednar said.
He suggested some important but not-so-obvious questions that equipment purchasers should ask their prospective lenders.
1. Is your funding source a direct lender?
A direct lender, as opposed to a broker, lends its own money directly to the practice. Direct lenders can prove advantageous because most are well-regarded by the industry they serve and are regulated at the national and state level. This one-stop shopping may save you time and money as well.
Brokers can shop for more loan options, which may prove beneficial if your financial standing isn’t strong. Be mindful of extra fees the broker might charge, though.
2. What fees might be incurred under various scenarios?
At some point, you may find it in the practice’s best interest to pay off the loan early. Some lending arrangements may require a prepayment penalty, so ask the question.
Additional expenses such as documentation fees — typically known as doc fees — can vary widely and should be considered when determining the total cost of the loan.
Another fee that catches veterinarians by surprise is interim rent. If the practice takes delivery of the equipment before the lease term begins, they might need to pay rent on the equipment. Practices can avoid the extra cost by accepting the equipment as close to the start of the lease date as possible.
3. What is your real rate?
“There’s a tendency in the industry for not knowing the true rate, or APR [annual percentage rate],” Bednar said.
The APR is a broader measure of the cost of a loan because it reflects all loan costs, not just the interest rate. Although the interest rate determines a monthly payment, the actual total cost of the loan is reflected in the APR and tends to vary among lenders. Reputable lenders will provide the APR as part of their disclosure.
The Fine Print
“Minimum and maximum loan amounts for equipment vary by what the loan proceeds will be used for,” said Jeff Holt, a senior consultant with PNC Bank’s Healthcare Business Banking. “The amount that a veterinarian may borrow should be specifically tailored to the unique circumstances of the practice.”
Larger loans, like for start-up operations that need numerous pieces of equipment, are normally funneled by the lender through the Small Business Administration.
The term length of most loans is 36 to 60 months but can be adjusted to accommodate circumstances and the projected lifespan of the equipment.
The equipment purchased is usually considered enough collateral for the loan. In the event the loan can’t be repaid and alternate terms can’t be negotiated, the equipment will be repossessed.
When you apply for a loan, the lender likely will request your personal credit score and tax returns for review. If the practice is established, you’ll probably be asked to produce the business’ financial statements, tax returns and possibly its business plan.
“Sharing the business plan with a financial services provider will allow for a more robust set of recommendations to help the hospital utilize credit more strategically,” Holt said.
Furthermore, the lender might confirm that your license is in good standing and that you operate as a legal entity in your state.
It’s prudent to do your own review before you apply to ensure approval and the best possible terms. Verify that your financial statements are available and in good order. Make sure business and personal funds are not commingled.
Many lenders will try to work out an agreement if the applicant’s financial standing is less than stellar.
“There are alternative solutions to consider in cases where the veterinarian’s credit history has some challenges,” Holt said.
The good news is most lenders have a fast approval turnaround time, sometimes within hours.