Loans v. leases: which is better for private practice equipment?

To take on a lease or take out a loan? For many small business owners, that really is the question. Especially for those in the medical field, it’s a tough choice between leasing expensive new equipment or financing it with a loan.

The good news is that options abound, all of which are geared to help your practice succeed. There is, however, a degree of research and consideration necessary to make the best decision for your business.

Loans

Buying your equipment via a loan is extremely popular, especially because the purchase of business equipment qualifies for favorable tax treatment.

Thanks to Section 179 of the tax code, you can immediately deduct up to $500,000 of the cost of new and used equipment  (even off-the-shelf software) provided that you put it into service the year you buy it. Section 179 also includes a first-year bonus depreciation, but, be advised, these numbers may change for 2017 taxes.

Even if your business lacks collateral, banks are eager to lend. You might even qualify for a low-cost equipment loan through the Small Business Administration.

The other key advantage of a loan is that you own the equipment once it’s paid off. Of course, owning the equipment is a two-edged sword, particularly when dealing with items like computer hardware, which may soon be obsolete.

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Moreover, when you buy the equipment, you also shoulder the financial burden of its maintenance and repairs.

There’s also the cash flow implications of buying versus leasing. Simply put, the monthly loan payments will almost always be higher than the monthly outlay for leasing the same equipment.

Further, your purchase will, in most states, mean paying a hefty sales tax, and you may also face a higher down payment than you would with a lease.

Next: What you need to know about leasing

Leases

Just about anything you need for private practice can be leased, including:

-       standard office equipment

-       computers and software

-       medical equipment

Much like leasing a car, the payments tend to be lower and they are fully tax deductible. There is a key difference regarding the tax deduction: with the lease, only the payment is tax deductible, whereas with the loan the full value of the equipment qualifies.

It’s wise to allocate 60-90 days for the full loan process. Therefore, leasing may be a better option if you can’t afford that time. Equally, newer businesses (1 to 2 years old) may have trouble qualifying for a loan at all. Leases have less strict requirements and tend to be processed faster.

In addition, leasing makes sense if you expect the equipment to be obsolete in a few years. From this perspective, leasing computers could make sense, while leasing office furniture likely would not. Still, there could be cases, such as if you unsure of staffing levels and don’t want to commit, where leasing even furniture makes sense. Similarly, leasing can be advantageous if you expect the equipment will need regular maintenance or frequent repairs, as those costs are generally borne by the leasing company.

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Should you decide that leasing is your best option, be aware that leases come in many flavors:

-       Fair Market Value Lease: sometimes called a “true lease,” this lease provides an option to buy the equipment for its fair market price when the lease expires.

-       Dollar Buyout Lease: also known as a “capital lease,” this lease allows you to buy the equipment at the end of the lease for $1. The lease payments, however, will likely be higher than an FMV lease. This option is dollar-for-dollar the same as a loan, and treated equivalently by the IRS. You wouldn’t technically own the equipment, however, until the end of the lease. For most businesses, a buyout lease and a loan are six-of-one, half-dozen of the other. 

-       Sale Lease Back: If you paid cash for equipment and wish you had leased it instead, a lender may offer cash for the equipment and convert your purchase into a lease.

Next: Don't forget to read the fine print

When deciding on a lease, pay attention to the "Lease Rate Factor." This figure refers to the lease payment as a percent of the total cost of the equipment-a measure of how “good” the deal is.

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Read the fine print

As for any major investment, mind the fine print of the loan/lease. Equally, if the stakes are high, having a business attorney review the loan or lease might not be a bad idea.

In particular, you’ll want to pay attention to:

-       Duration

-       Monthly payments in context of your monthly cash flow

-       Penalties for late payments or for paying it off in advance

-       Market value of the equipment

-       Tax implications

-       Renewal options

-       Security deposits

-       Warranties

At the end of the day, the choice is determined by your short-term and long-term needs, coupled with the financial state of your practice. Did you just land a project that requires sudden growth? Or do you have a short-term project with no guarantee of extension? What will be the impact on your cash flow and your overall balance sheet?

Once you’ve weighed these factors, it should be a no-brainer.

George Thomas Jr. is a former newspaper reporter, award-winning filmmaker, and outdoor enthusiast who once held the title "Webmaster." He writes about legal issues in everyday life on the Avvo Stories blog. Avvo helps people find and connect with the right lawyer through industry leading content, tools and services.