Leasing Advantages

Why Lease?
Billions of dollars are spent each year on the acquisition of medical equipment, from laboratory to diagnostics, from treatment to personal care. The vast majority of those acquisitions are financed or leased, and not just out of necessity.

In reviewing the “why lease” question, it is important to compare leasing to the available alternatives, such as cash, bank loans, or the various forms of vendor financing. Below please find discussion points to be considered when any major capital purchase is made:
Leasing vs. Cash
Obsolescence... If the technology of the equipment advances, and you expect to upgrade (i.e. return) the equipment in 3 or 5 years, you may be better off by leasing the equipment and returning it when the term expires. Pay for the use of the equipment, not the ownership.

Useful Life: Some equipment simply wears out in 5 years’ time, in which case higher service/maintenance costs and increased downtime can quickly offset any value of equipment ownership.

Cash has a price…Assuming competitive lease rates are available, would you not be better off investing that cash on capital improvements or new programs or services which can provide a higher rate of return than the cost of the lease?

Cash flow… Leasing allows you to match the revenue generated by the asset with the cost of the monthly lease payment. It also typically allows for 100% of the equipment cost to be financed, and in many cases will include any shipping and/or installation charges. This bundling allows for minimal cash outlays at the time of acquisition.

Asset management… owning the equipment means knowing how to best dispose of the equipment when no longer of use. While the equipment may have value, your expertise as an organization is the treatment and curing of patients, not scouring the global market place for the best price of used medical equipment. Why not take advantage of the lessor’s expertise, which, in part, creates the low monthly lease payment.

Off Balance Sheet… Certain leasing structures, specifically FASB 13 operating lease structures, may allow you to acquire the equipment without adding to the amortization or depreciation expense of your balance sheet, and the cost of the lease payment can be expensed out of operations.
Leasing vs. Bank Loan
Same as cash… Again, do you really want to own the equipment at the end of the term? All of the aforementioned issues of equipment disposition, technological advancement, useful life, and asset management still apply.

Conserve bank lines… If ownership is really desired, why not finance the equipment with a leasing company, and conserve your bank lines for your short term cash and cash flow needs, or your long term expansion or improvement needs.

Get a cap… if technology is at issue, why not get a cap on your end-of-lease purchase option? That way you will know upfront what your total “all-in” cost of financing is should you purchase the equipment at lease end. In many cases this compares very favorably to the bank loan, and should you decide to return the equipment, you will have saved hundreds or thousands of dollars compared to the “finance to ownership” plan.
Leasing (3rd Party) vs. Vendor Financing
Most equipment vendors, when providing an equipment proposal, include lease rates, or at minimum a leasing source as part of their proposal. A prudent business practice as cash availability is always in question. However, is it truly a better deal, a better rate, or a more convenient alternative as touted? Before you sign up with their leasing company, ask yourself a few questions…

Is it more flexible? … Customers may think (or be told) that if they lease with the vendor’s company they will have more flexibility to upgrade or get out of the lease. The reality is that very few equipment companies have their own lessor. They are most likely partnering with a 3rd party lessor that will have the same restrictions on cancellation or upgrades as any other leasing company.

Is the leasing company impartial? … Many vendor lessors, be it in-house or third party, will provide preferential treatment to their equipment partners when the lease is over and the time to upgrade has come. Their flexibility and impartiality end if you decide to change vendors at lease, or heaven forbid, prior to lease expiration. Additionally, the vendor lessor’s contract may require a predefined lease acceptance, regardless of when the equipment becomes available for use!

Is it more competitive? … preying on the convenience of being the preferred lease vendor, the lease rate/payment you see may not be as competitive in the marketplace as you think. Granted, $10-20 a month may not be that significant of a difference, but $100-200 a month would be!

Getting a quote from an independent third party lessor will do one of three things, a) validate your decision to go with vendor financing, b) give you “ammo” to get a more competitive rate from the vendor finance company, or c) give you a better rate from an independent.

Is it more convenient? … As mentioned above, most equipment vendors partner with a third party lessor to provide financing for their products, and thus the credit application, documentation, and lease process are the same as if you were with any reputable lessor.
Lease vs. Reagent Rental/Cost Per Test
A reagent rental or Cost per Test (“CPT”) agreement is one in which the capital costs for the equipment are rolled into the cost of the reagents. This financing arrangement is most commonly found with laboratory equipment, but occasionally radiology or endoscopy equipment on a “cost per procedure” basis.

It costs more… It is well known in the industry that the financing component of a reagent rental program is higher than a straight lease would be. It’s higher because the leasing company has more work to do with respect to invoicing, reviewing usages for shortages, overages, etc, and because they do not receive the same guaranteed even payment stream of a lease.

It is also higher because it is easy to bury a high rate into the transaction, as the capital portion of a lease is usually less than 1/3 of the total CPT.

It costs more again… If your usage goes up, so does your monthly bill. Most RR’s are written with minimum monthly commitments, but no caps on overages. For example, if your agreement calls for 1,000 tests/month, but you only run 900; you still pay for 1,000. However, if you run 1,100 tests/month, you will most likely be billed for all 1,100 tests at the same rate, with no reduction for the capital dollars included in that CPT price!

It still costs more… On a CPT, your cost basis for reagents is higher because it includes $$’s for the equipment. When the vendor raises it prices on reagents, the increase is larger due to that higher cost basis. For example, if you had a cost per test price of $4.00 under a reagent rental contract, and that price went up 3%, your new cost per test would be $4.12. If the equipment was leased separately, the cost per test might only be $3.00; in which case a 3% increase would only be $.09. Three cents is not much to be concerned with until you realize that you run 100,000 of those tests per year, costing an additional $3,000. Once a lease starts, the payment remains constant during the entire term!

Is it operating?… many view a reagent rental contract as an operating lease because the capital costs are buried in the cost of the reagents or supplies, however, as many rental contracts are non-cancelable agreements, upon further review they would be considered a capital obligation of the institution.

Get a lease quote… much like vendor financing above, there is no harm in getting a straight lease quote and matching it up with a “reagent only” reagent contract to compare the total cash outlay with that of the reagent rental program. With a straight lease, the equipment cost is fixed, and reagent costs go up and down with testing volumes.