Ah! What to do with our hard-earned dollars? How do we allocate each dollar wisely? As always, budgeting, cash-flow planning, and financial forecasting (being proactive vs. reactive with our planning) can help us run strong, stable businesses and weather the storms.
Some doctors thrive in a personality-based clinic and have a loyal following no matter what services or equipment they offer, but for most chiropractic offices who are trying to grow and expand, new equipment purchases help us stay relevant and continue to service our client base in the best, most up-to-date manner possible.
When it comes to buying equipment for your business, the financing method you choose can have a significant impact on your cash flow, financial operations, and long-term wealth creation. Regarding equipment purchasing: should you lease, get a bank loan, or pay cash?
I purchased hundreds of thousands of dollars in equipment over my 22 years in practice. While I wish I could say I paid cash for all those items, I certainly learned the value of doing so.
Cash Is King
You’ll always be better off paying cash for equipment. Here’s why:
1. Giving up your cash makes you think really hard about whether you need the equipment. It should force you to be more cautious and do all your due diligence before pulling the trigger.
2. Cost savings. When you pay cash, you are avoiding interest payments and financing fees.
3. Better deals – usually. If you have cash in the bank and remain content and patient, yet are ready to pounce, you can usually get a used piece of equipment significantly cheaper than new, and sometimes at a fire-sale. I bought a laser this way – it was over $60,000 new, but with cash in the bank I was able to pounce on a deal for $19,000. Even when I had to do deferred maintenance / licensing on the laser, the additional cost was only $8,000 – still substantial savings over a new laser.
4. You own it. Paying cash means you own the equipment outright from the start. This item becomes a full asset on your balance sheet vs a liability. You can also be nimble and decide to sell it after a while if it is proving to not live up to its hype.
5. Tax Benefits. Of course, depreciation is a valuable tool resulting in significant tax savings, effectively lowering the cost of the equipment.
6. No strings attached. Owning your equipment means no loan or lease agreements with usage restrictions or maintenance requirements. You can use, modify, and manage your equipment however you see fit without worrying about violating any terms.
7. Simplified finances. Paying cash means no monthly payments to track, which makes your financial planning simpler and improves cash-flow management. All you have to worry about now is how to turn this piece of equipment into a money-printing machine.
If Cash Is Not an Option
Now for some of us, especially younger docs in practice, paying cash is not an option. In this situation, what is the best way? Bank loan or lease?
First off, before taking on any additional debt, my advice is always to get counsel from consultants, advisors, marketers, and doctors who have the piece of equipment you want to buy.
The consultants and advisors can help you crunch the numbers. The marketers can run all their digital scenarios to make sure there is demand for this new service and can help gauge competition and the strength of the niche. And of course, doctors will give you the boots-on-the-ground feedback on whether they are actually making money with this new toy – and how much money they’re having to spend to get patients.
I’d also recommend that your advisors have no skin in the game, i.e., they won’t profit from you purchasing the equipment. While it’s certainly wise to get all the information available from the sales rep on efficacy, marketing, and estimated ROI – in my experience – it’s always best to get your financial advice and analysis from other non-biased resources.
Also, consider all expenses associated with this new equipment. Not only are you increasing your monthly overhead with the lease or loan payment, but you’re also significantly increasing overhead of marketing, space in your clinic, staff, and supplies.
Once all due diligence has been done and all counselors have given the green light, then the question becomes: “should I lease or get a bank loan?”
Bank Loan / Line of Credit
When you can’t pay cash, go for a bank loan or bank line of credit. Here’s why:
1. Lower cost compared to leasing. Bank loans typically have lower interest rates than the implicit rates in lease agreements. Leasing often comes with higher costs due to built-in interest and extra fees.
2. Flexible terms. Bank loans can be customized to fit your business needs with different interest rates, repayment schedules, and loan durations. This flexibility can help you manage your finances more effectively. Typically, there are no prepayment fees with loans. Be sure to read the fine print.
Leasing Typically Isn’t the Best Choice
Although I may get some pushback from leasing companies, I had two not-so-great experiences with leases. Leasing might seem attractive due to lower upfront costs and ease of approval; however, there is no free lunch. I remember getting a lease one time and they gave me six months of no payments.
Sounds great, right?! Not so fast. Interest accrued, and this ended up costing me several thousand dollars more over the lease term.
1. Complex contract terms. Lease agreements often come with complex terms and conditions that can be difficult to understand. These terms may include clauses on maintenance responsibilities, early-termination penalties, and end-of-lease obligations. It’s essential to thoroughly review and comprehend all aspects of the lease contract to avoid unexpected costs or obligations.
2. Ownership. Leasing means you don’t own the equipment, and you might face extra costs if you want to buy it at the end of the lease. This happened to me. Cash flow was good, and I wanted to pay off my lease early. However, I failed to read the fine print on the front end. I was flabbergasted and more than a little ticked off when I found out the payoff was about $15,000 more than I was expecting. My experience may be a one-off, but it certainly was not fun and put a bad taste in my mouth for leasing ever again.
With that said, I know there are reputable leasing companies out there, and if they are vetted and you have done your homework, they may be a good option for you.
Conclusion
My experience and periods of “learning the hard way” made me see the value in slowing down, getting counsel, and really analyzing the numbers. Once you and your advisors determine the equipment is needed, necessary, will grow the practice, and won’t become a financial burden, then GO FOR IT. Get that equipment, pay for all of it or most of it in cash, help more people, and build a solid financial future for yourself and your family.
Conversely, while continually using loans or leases and building your practice on debt might be easier in the short term, this pattern will create stress and anxiety in the long term. That is, unless you have unlimited money-printing-power and a seared financial conscience, like our government!
Until next time...
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