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Healthcare facilities require lots of medical equipment. This is true of nursing homes, doctor offices, physician groups, hospitals and stand-alone clinics, to name a few. Today there are more options ever before for financing or leasing medical equipment. Understanding the differences and choosing the right financial vehicle instrument is critical to managing cash flow of the practice, maintaining the equipment, getting updated equipment, and disposing of it when no longer needed.
The major fork in the road for medical equipment is the choice between financing with loans or a program for medical equipment leasing. Both options are available from lenders across the country. Although both instruments achieve the goal of providing equipment to the medical practice there are some significant differences to consider. In particular a new form of financing - the Equipment Finance Agreement (EFA) - has gained popularity in the last few years.
An EFA is a loan document that takes the place of a loan agreement, note and security agreement. In essence it makes the lender the lien-holder and puts a security interest against the equipment. Once an EFA is completed, your business owns the equipment from day one.
A Lease is simply a contract conveying property to another for a specified period of time. In this contract your business acquires the use of, but does not own, the equipment in question. You usually will have the option to purchase the equipment at the end of term - or to return it to the provider.
You may want to have the option to purchase the asset, continue leasing it, or send it back at the end of the lease term. The $1.00 out lease is extremely popular with businesses in the United States. It allows a business to know it will be paying $1.00 at the end of the lease to transfer the asset from the leasing company to the business. This is especially popular with equipment that might lose value quickly or become obsolete such as computers. In the case when there is a residual associated with the lease it is generally considered a Fair Market Value Lease. Obviously, this option is not available in an EFA because you have already purchased the equipment.
Some lenders like the benefit of the EFA because it protects them from liability. For example, in vehicles or equipment that have inherit risk lenders have less legal exposure because they have no ownership in the asset and are merely a lien-holder on the asset. Some lenders are also more lenient in allowing prepaying the EFA as opposed to the lease since it is in fact a form of loan.
Remember the following facts about these agreements when making your decision. An EFA is a loan and a Lease is a rental that might have a purchase option.
Read the contract carefully before you sign. It should be very apparent which kind of contract you are in. One will say “Lease” and other will say “Finance”. If you know what you want ask your lender. By understanding the benefits of each structure your business can maximize profit and minimize your headache at the end of the contract especially in a lease. Make sure you understand the end of term options in advance and choose the agreement that suits the needs of your facility.
Tom Williams is President of eLease Equipment Leasing. He was inducted into the Leasing Hall of Fame for his work pioneering the use of the world wide web to help entrepreneurs fund their businesses.
He has a degree in Economics from Boston University. Tom writes regularly on his blog about medical equipment leasing.
The major fork in the road for medical equipment is the choice between financing with loans or a program for medical equipment leasing. Both options are available from lenders across the country. Although both instruments achieve the goal of providing equipment to the medical practice there are some significant differences to consider. In particular a new form of financing - the Equipment Finance Agreement (EFA) - has gained popularity in the last few years.
An EFA is a loan document that takes the place of a loan agreement, note and security agreement. In essence it makes the lender the lien-holder and puts a security interest against the equipment. Once an EFA is completed, your business owns the equipment from day one.
A Lease is simply a contract conveying property to another for a specified period of time. In this contract your business acquires the use of, but does not own, the equipment in question. You usually will have the option to purchase the equipment at the end of term - or to return it to the provider.
You may want to have the option to purchase the asset, continue leasing it, or send it back at the end of the lease term. The $1.00 out lease is extremely popular with businesses in the United States. It allows a business to know it will be paying $1.00 at the end of the lease to transfer the asset from the leasing company to the business. This is especially popular with equipment that might lose value quickly or become obsolete such as computers. In the case when there is a residual associated with the lease it is generally considered a Fair Market Value Lease. Obviously, this option is not available in an EFA because you have already purchased the equipment.
Some lenders like the benefit of the EFA because it protects them from liability. For example, in vehicles or equipment that have inherit risk lenders have less legal exposure because they have no ownership in the asset and are merely a lien-holder on the asset. Some lenders are also more lenient in allowing prepaying the EFA as opposed to the lease since it is in fact a form of loan.
Remember the following facts about these agreements when making your decision. An EFA is a loan and a Lease is a rental that might have a purchase option.
Read the contract carefully before you sign. It should be very apparent which kind of contract you are in. One will say “Lease” and other will say “Finance”. If you know what you want ask your lender. By understanding the benefits of each structure your business can maximize profit and minimize your headache at the end of the contract especially in a lease. Make sure you understand the end of term options in advance and choose the agreement that suits the needs of your facility.
Tom Williams is President of eLease Equipment Leasing. He was inducted into the Leasing Hall of Fame for his work pioneering the use of the world wide web to help entrepreneurs fund their businesses.
He has a degree in Economics from Boston University. Tom writes regularly on his blog about medical equipment leasing.