Why Medical Practices Choose Finance Over Cash
Purchasing medical equipment outright can require a significant amount of capital that could otherwise remain available for staff wages, practice expenses, fit-out costs, marketing or unexpected operating expenses. Equipment finance allows the cost of eligible equipment to be spread over an agreed loan term while preserving more of the practice's available cash.
For doctors, dentists and other healthcare professionals, the cost of establishing or expanding a practice can add up quickly. Dental chairs, ultrasound machines, diagnostic equipment, sterilisation systems, medical lasers and other specialised equipment can represent a substantial upfront investment, particularly when several items are being purchased at the same time.
This can be particularly relevant for healthcare businesses around Woolloongabba, which is home to the Princess Alexandra Hospital and sits close to some of Brisbane's major medical and hospital precincts. Rather than directing a large amount of cash towards a single equipment purchase, finance can allow a practice to acquire the equipment it needs while retaining funds for the broader costs of running and growing the business.
For example, a specialist establishing a new consulting practice may need to purchase diagnostic equipment, treatment equipment, furniture and technology before seeing their first patient. Financing the larger medical equipment purchases can reduce the initial cash requirement and provide predictable repayments while the practice establishes its patient base and revenue.
Chattel Mortgage or Hire Purchase for Medical Equipment
A chattel mortgage is a common form of equipment finance where the business purchases and owns the equipment from the beginning, while the lender takes security over the financed asset until the loan is repaid.
This structure can be used for a wide range of medical and healthcare equipment, including dental chairs, ultrasound machines, imaging equipment, ophthalmic equipment, medical lasers, sterilisation equipment and other identifiable business assets.
Depending on the business's circumstances, a chattel mortgage may also provide taxation and GST benefits. For example, eligible businesses may be able to claim depreciation on the equipment, a deduction for interest incurred on finance used for business purposes and GST credits where applicable. The exact treatment will depend on the entity, GST registration and use of the equipment, so these implications should be confirmed with an accountant or tax adviser.
Hire purchase is another option. Under a hire purchase arrangement, the financier generally retains legal ownership of the equipment during the finance term while the business uses the asset and makes agreed repayments. Ownership typically transfers once the required payments and any applicable final amount have been made.
The most appropriate structure will depend on the equipment being purchased, the practice's cash flow, preferred loan term and accounting and tax position.
How Tax Deductions Work on Medical Equipment
Medical equipment used to generate business income will generally be treated as a depreciating asset for tax purposes. This means an eligible business may be able to claim deductions for the decline in value of the equipment over its effective life.
Where money is borrowed to purchase equipment that is used for business purposes, the interest charged on that borrowing may also be deductible to the extent the finance relates to producing assessable income.
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Different depreciation concessions may also be available depending on the size and structure of the business, the cost of the equipment and the rules applying during the relevant income year. The eligibility requirements and thresholds for measures such as the instant asset write-off have changed over time, so practices should confirm the current treatment with their accountant before relying on a particular tax outcome.
If equipment is used partly for private or non-business purposes, deductions may also need to be apportioned accordingly.
Finance should therefore be selected based on the commercial needs of the practice rather than the tax deduction alone, with the tax implications confirmed separately with a suitably qualified adviser.
What Lenders Look for When Assessing Medical Equipment Finance
When assessing medical equipment finance, lenders will generally consider the financial position of the borrower, the trading history of the practice, the type and value of the equipment being purchased and the business's ability to service the proposed repayments.
For an established medical practice, the lender may review recent financial statements, tax returns, business bank statements or other evidence of practice income. The requirements can vary considerably between lenders and may also depend on the size of the loan.
Medical professionals can sometimes have access to specialised lending policies because lenders may take the applicant's profession, qualifications and income profile into consideration. However, lending criteria still vary between banks and specialist lenders, so being a doctor, dentist or other healthcare professional does not automatically guarantee approval.
The equipment itself is also important. Established equipment with a clear purchase price, identifiable serial numbers and an active resale market may be easier for a lender to assess than highly specialised or customised equipment.
Finance may be available for both new and used equipment, although lender requirements can vary depending on the age, condition and expected useful life of the asset.
Finance Terms and Repayment Structures for Medical Equipment
The appropriate finance term will depend on the type of equipment, its expected useful life, the loan amount and the lender's policy.
Spreading the finance over a longer term generally reduces the regular repayment but increases the amount of interest paid over the life of the loan. A shorter term results in higher repayments but allows the debt to be repaid sooner.
Fixed repayments are common with medical equipment finance and can make budgeting easier because the practice knows what its regular commitment will be throughout the agreed term.
Some finance structures may also allow a balloon or residual payment at the end of the term. This reduces the regular repayment by leaving an agreed portion of the loan to be paid at the end.
For example, if a practice finances $200,000 of medical equipment with a 20% balloon, $40,000 would remain payable at the end of the term. Depending on the circumstances and lender requirements, the practice may then pay that amount from available funds, refinance it or use proceeds from replacing or selling the equipment.
Whether a balloon is appropriate will depend on the expected value and useful life of the equipment, the practice's future cash flow and how frequently the equipment is expected to be upgraded.
Why Working Capital Matters for Medical Practices
Paying cash for medical equipment eliminates the need for finance repayments and interest, but it also reduces the amount of cash immediately available to the business.
For an established practice this may reduce the buffer available for wages, rent, consumables, insurance and other operating expenses. For a new practice, those cash reserves can be particularly important while patient numbers and revenue are still growing.
Consider a practitioner with $300,000 available to establish or expand a clinic. Using $200,000 of that cash to purchase equipment outright would leave only $100,000 available for the remaining costs of the business.
Financing some or all of the eligible equipment may allow the practice to retain more of that capital while spreading the equipment cost across the period in which the asset is being used to generate revenue.
That does not mean finance will always be preferable to paying cash. The right decision depends on the cost of borrowing, the practice's available capital, cash flow and what that capital would otherwise be used for.
Medical Equipment Finance Versus Practice Fit-Out Finance
Not every expense involved in establishing a medical practice will necessarily qualify for traditional equipment finance.
Equipment finance is generally best suited to identifiable assets such as dental chairs, ultrasound machines, medical imaging equipment, sterilisation systems, medical lasers, treatment equipment and other movable business assets.
A practice fit-out can involve different expenses, including cabinetry, plumbing, electrical work, flooring, partitions and other improvements that become part of the premises. These costs may need to be financed through a different type of business loan or commercial loan rather than traditional asset finance.
Where a new practice involves both equipment and fit-out costs, it can therefore make sense to separate the funding into appropriate facilities rather than trying to finance every expense through one loan.
This can also help ensure that the loan term and repayment structure are appropriate for the assets and expenses being funded.
Buying New or Used Medical Equipment
Both new and used medical equipment may be eligible for finance, depending on the lender and the asset.
New equipment can be easier to assess because the purchase price is supported by a supplier invoice and the equipment has its full expected useful life ahead of it. Some suppliers may also include warranties, servicing arrangements or training as part of the purchase.
Used equipment can reduce the upfront purchase price but may be subject to additional lender requirements. The lender may consider the age, condition, purchase price and expected remaining useful life of the asset when determining the available loan term or maximum amount they are prepared to finance.
For higher-value or specialised used equipment, additional information or an independent valuation may sometimes be required.
The finance term should generally make sense relative to how long the practice expects to use the equipment. Financing equipment well beyond its expected useful life can create problems if the practice needs to replace the asset while the existing debt is still outstanding.
Financing Equipment When Establishing a New Practice
Medical equipment finance is not limited to established practices.
Doctors, dentists and other healthcare professionals establishing a new practice may also be able to obtain equipment finance, although the assessment can differ because there may be limited or no historical practice income available.
Depending on the lender and profession, the application may instead consider the practitioner's qualifications, professional experience, existing income, projected practice revenue, available cash contribution and the type of equipment being purchased.
This can be particularly relevant for medical professionals transitioning from employment or contracting arrangements into practice ownership.
The equipment finance may also form only one part of the overall funding requirement. A new practice might require separate funding for the premises, fit-out, equipment and initial working capital.
Structuring these facilities together can help establish the total funding requirement before commitments are made to landlords, suppliers or equipment providers.
Equipment Finance Options Across Multiple Lenders
Different banks and specialist lenders can have different policies for medical equipment, healthcare professionals, new practices and established businesses.
One lender may offer a more competitive rate but require a longer trading history, while another may provide a more flexible assessment for a medical professional establishing their first practice. Loan terms, deposit requirements, balloon options and documentation requirements can also vary.
By comparing equipment finance options across multiple lenders, Wealthcove can help you understand the available structures based on the equipment you're purchasing, your practice's financial position and your broader objectives.
If the project also involves purchasing commercial premises, completing a practice fit-out or obtaining additional working capital, we can also review commercial loan and business loan options so the different facilities work together.
Ready to Finance Medical Equipment for Your Practice?
Whether you're establishing a new practice, upgrading existing equipment or investing in additional technology as your practice grows, Wealthcove can compare lenders, finance structures and repayment options based on your circumstances. Book an appointment with Liam Pahl, Finance & Mortgage Broker at Wealthcove or call Liam directly on 0452 646 192 to discuss your medical equipment finance options.
