Here’s a frequently asked question from clients: Can I afford an expensive device for my healthcare practice? And how should I use my business finances to pay for it?
Like many successful entrepreneurs, you understand that business growth comes from investments. You may have to spend more to earn more. But when it comes to high-value devices with six-digit price tags, it’s wise to check your finances first.
Start by making a budget to determine your available cash flow. Then, you can decide whether to lease or buy the device.
Make a Budget
A healthcare practice budget tracks revenue and expenses to reveal how much cash you have left for spending. Start by considering revenue estimates. How many patients do you think will walk through your door daily? How much average revenue comes from each patient? Do you plan to see more patients or increase fees? Setting realistic revenue goals is key to getting the bottom number right.
Next, plan for expenses. Factor in rent, payroll, supplies, and other routine costs. Once you subtract this total number from your revenue, take a look at what’s left. If your budget consistently shows extra money leftover at the end of every month, you might be able to afford an additional investment.
But if that bottom number is slim, consider holding off on big investments. You can focus on increasing profit without cutting expenses until your profit goals are more on track.
Watch the Maven Minute about budgeting your business finances.
Option 1: Lease the Device
When it comes to leasing versus buying, it’s helpful to understand the lease structure. If you own the equipment at the end of the lease, the IRS considers the lease a “loan” and taxes it accordingly. If you return the equipment at the end of the lease, the IRS considers it a true “lease.”
Here are a few facts about leasing equipment:
- It’s quick and easy to get financing through the vendor that sells the equipment.
- The lease payments are tax-deductible as you make the payments—assuming it’s a true lease as described above.
- You do not depreciate the equipment since you deduct the lease payments.
- Depending on how the lease is structured, you may not truly own it—meaning you don’t keep it at the end of the term.
- The interest rate is usually not disclosed, so you might end up paying more to finance it.
Option 2: Buy the Device
Another way to gain new equipment is to purchase it with a loan. Here are a few facts about buying equipment:
- You own the equipment as an investment in your business.
- You may have to pay cash or get a bank loan to finance, which may take longer depending on bank relationship.
- You only get tax deductions for interest, not principal.
- You depreciate the equipment. You can depreciate it over five years or all in the first year, which can be a tax deduction.
- You know the interest rate, and it’s usually more competitive than a bank loan.
In summary, check your budget first to make sure there’s enough cash flow for a new investment. If so, leasing equipment can be faster and easier. But if you have a banking relationship, a loan to buy equipment can be a good choice—it might just take longer to get.
Maven is a team of financial analysts, but we’re also in the business of making connections. We regularly answer questions from clients like you who want to understand their business finances. Want to talk about a topic with us? Contact us today!