As you look at equipping your practice, from computers to chairs, you will be faced with decisions on how to finance the equipment. Loan or lease? Which one makes the most sense and would be best for your practice? What are the true costs associated with financing equipment?
There are many factors beyond the monthly payment to consider when financing equipment, including tax benefits, buy-out provisions, hidden fees or other expenses and prepayment costs, just to name a few.
- Cash Management – By financing your equipment, you can preserve cash on hand for other day-to-day expenses associated with your practice.
- Preserve Credit Lines – If you've established a line of credit with your bank, you don't need to draw on it for your equipment expense but can instead keep it available for other operating expenses.
- Conserve Working Capital – You'll be able to use the equipment while spreading payments out over the life of the asset. This allows you to generate income before paying for the equipment in full.
- Other Investments – By financing your equipment, you can use your cash for other business investments that might produce a higher rate of return.
- Tax Advantages – Section 179 of the Internal Revenue Code may allow you to deduct the full value of the equipment, even if it's 100 percent financed. The tax savings can be significant.
Leases and loans may use similar terminology but that terminology may have different meanings. Key terms you'll want to understand include:
- Up-front payments
- Security deposits
- Prepayment costs
- Interest rate
- Buy-out provisions
- End-of-term buyout
You'll also need to determine if there are any hidden fees such as a penalty for early pay-off or documentation fees.
When it's time to finance equipment, you may want to talk to your accountant or tax advisor. Discuss the pros and cons of financing compared with other payment options before making a final decision.