If you run a medical practice and you’re in need of state-of-the-art medical equipment for your patients, chances are you’ve looked into taking out a loan to help with the cost. This is a common issue and there are many avenues available to you.
Scroll down for some more information that can help you learn about medical equipment loans and make the best decision for your business.
Medical equipment is very expensive and your patients and fellow practitioners expect you to have high-tech hardware and tools, even in a small clinic. Of course, it doesn’t help that this equipment sometimes becomes obsolete within a few years. Even though you’ll likely make your money back on your investment in new medical equipment, the up-front cost can still be intimidating.
Not everyone can get to a large, state-of-the-art hospital for their medical care. That’s one of the reasons smaller practices are spread out around the country. But they rarely have the same financial resources available to put towards new equipment – at least not enough to pay the full cost up-front. But working capital and liquidity issues shouldn’t prevent you from keeping your office up-to-date.
Luckily, smaller practices can finance these large and vital equipment purchases by taking out a medical equipment loan. These loans allow you to make payments over a longer period of time, using the income you make from using the devices.
You have two choices when you need new medical equipment – buying or leasing. Both options require you to pay regular installments (usually monthly) over the course of several years. If you finance a purchase, then the equipment is yours to keep and possibly resell after you’re done making payments. If you lease the equipment, your monthly payments will likely be lower, but you will agree to return the equipment after a specified period of time.
If you decide you want to own the equipment, you can finance your purchase through a bank. This is especially true if you have excellent credit and your medical practice has been open for at least two years.
An alternative is to apply for financing through the medical equipment company itself. This works much the same way (you’ll make payments to them over time). In either case, it’s common to put up the product itself as the collateral.
A good relationship with a lender and excellent credit can even get you a loan for up to 100% of the purchase price, meaning you could get a medical equipment loan with little or no down payment. But it will all depend on your unique circumstances and the type of loan you choose.
You can buy whatever equipment you’d like with most medical equipment loans, and different practices will have different needs. General and specialist practices, as well as dental and optometry offices can all take out loans to get the tools they need to grow their small business.
Small practices can finance tools that include, but are not limited to:
· Imaging equipment such as X-ray machines
· Hospital beds and examination tables
· Specialized surgical equipment
· Medical information management systems
You may decide to purchase this equipment new or use your financing on lightly used equipment.
While you may be able to get a medical equipment loan to buy used equipment, it can be more complicated than financing new items. You won’t have as many choices when it comes to lenders, but many banks offer loans for both new and used equipment.
Keep in mind that the condition of the product will help decide the down-payment, installment plan, interest rate, and length of the loan. That means you’ll have to share more information about the specific piece of equipment you’ve chosen in order to secure an approval and reasonable payment plan. So make sure you know the history of the item(s) and how long it will be useful to you.
To apply for a loan for used medical equipment, you will likely need to prove that the item isn’t in danger of becoming obsolete before the end of your loan term. If the bank won’t be able to repossess and sell the equipment in case of a loan default, they’re less likely to grant you the loan.
If you don’t have the working capital to purchase a piece of equipment outright, or you don’t know if you’ll need to make it a permanent part of your practice, it may be cheaper to lease it. This is basically a way of renting the equipment for a specific period of time, usually from the equipment company or the bank they’re affiliated with.
Leasing can be a great option if you want to frequently update your equipment and if it’s not your goal to eventually own it. The leasing company will retain ownership and, just like a car rental, can do what they want with it after the lease is up.
In some cases, companies might offer lease-to-own agreements in which you have the option to purchase the equipment after your lease ends. This may be a good option if your cash flow is low at the moment but you expect it to improve over time, or if you’re simply not sure if you want to commit to owning a piece of equipment long-term.
There are a few types of medical equipment loans you should know about if you’re thinking about financing a large purchase for your practice. Each has its pros and cons.
This is typically the default choice for many small medical practices. With equipment financing, rates will vary by lender, but your terms will likely be more favorable. This is especially the case if you already have a relationship with an equipment company or bank and can negotiate favorable loan terms. They will take into account the number of years you’ve been in business, your potential for income, and your credit score.
A typical loan can have a repayment term of anywhere from 1-5 years. This will depend largely on the price of the equipment and the monthly payment amount you think you can afford.
You may get a lower interest rate by taking out a longer term loan. These are typically reserved for very expensive pieces of equipment or legacy equipment that is unlikely to lose much value over time.
You will still need good credit, typically at least 2 years in business, and proof of adequate cash flow to secure these types of loans. But the benefit is that you can get somewhere in the neighborhood of 10+ years to pay them off.
Just keep in mind that initial payments usually go towards the interest, meaning you’re not paying as much towards the actual equipment purchase until later in your loan term.
If you are buying small and relatively inexpensive equipment, you may want to consider a short-term loan. These are loans that you can generally pay off in less than 3 years, and sometimes as little as a few months.
These can also be a good option for businesses with bad credit because these loans often require you to make weekly (or even daily) payments. This means there will be less long-term risk for the bank.
The U.S. Small Business Administration (SBA) is another good option for those looking to take out smaller loans. The agency doesn’t make the loans directly, but works with lenders on your behalf to help secure your medical equipment loan. This relationship offers less risk for the lending financial institutions, which in turn makes it easier for them to approve your loan.
Most SBA loans are limited to 10 years for equipment loans. Some downsides include higher interest rates and a relatively long application process. But you may also be able to secure a loan with a lower down payment or even no collateral, depending on your circumstances.
If you need consistent cash flow in order to upgrade your medical equipment more often, you might consider a business line of credit. The amount of your loan will be based on your credit score, and you can withdraw just a portion of the loan amount. In this case, only what you borrow from the total is what you’ll pay interest on (this works much like a credit card). The amount of your loan will be based mostly on your credit score.
This type of credit line is also called revolving credit because you are permitted to borrow, pay back, and reuse the money as you need it.
A merchant cash advance (MCA) is not technically a loan, but works more like an investment because the money is leveraged against your business’s future sales. These are commonly used as a short-term financing option that can be repaid via smaller weekly or daily payments. Merchant cash advances are most common among those who have less-than-ideal credit but need cash fast.
Your payment is made in the form of a holdback that is deducted from your credit or debit card sales. The business providing the MCA will perform a risk assessment and assign you a factor rate, usually between 1.0 and 1.5. So, for example, if you received a $40,000 MCA with a factor rate of 1.2, you would multiple those numbers together in order to see how much you’ll eventually end up paying back ($40,000 x 1.20 = $48,000). In this case, the more income you generate, the faster you can pay back the money.
This type of financing is also common if you’re using an online lender.
The interest rate on any type of loan is largely based on your credit score, your business’s revenue, and how long you’ve been in business. Those with good credit, steady annual income of at least $100,000, and established medical practices (more than 2 years old) are more likely to get favorable interest rates. If you have bad credit and no track record, interest rates can approach 20% or more.
Starting interest rates also vary based on the type of loan you take out. But if your credit and business are in good standing, you can expect interest rates to start at the following levels for each type of loan:
· Equipment Financing: 8%
· Short-Term Loan: 10%
· Business Line of Credit: 8%
· Merchant Cash Advance: 1.10 (factor rate)
If you’re planning to apply for a medical equipment loan to finance items for your practice, you’ll need to pull together a few items before your trip to the bank or online application.
Gather up the following before sitting down to fill out forms:
· Recent bank statements
o You will likely need your own bank statements in addition to those from your business. You may even need personal and financial information from business partners.
· Tax returns (both personal and business)
· Profit and loss statements
You may want to “shop around” for the best rate if you plan to borrow money in order to finance your equipment purchase. If you have a relationship with a bank, it may be wise to talk to your banker first and ask if an inquiry into loan terms will affect your credit score. Then you can check online to see if the rates are better before making your final choice.
If you’re looking to give your patients and clients the best care possible, you need the best equipment for your medical practice. Because these items are so expensive, many business owners need to rely on medical equipment loans to make these purchases possible. But as you can see, there are multiple financing options available to you and your business.