Capital equipment can improve your practice’s efficiency and skills, but should you stay ‘cash flow positive’ by choosing to lease rather than buying? Kerryn Ramsey weighs up the facts.
When it’s time to acquire, upgrade or replace capital equipment, there are various options when it comes to getting the right finance package. New technology can eventually improve your cash flow, but it’s essential to do the maths in the early stages.
“A business case should be prepared to determine the best type of finance—a lease, hire purchase or chattel mortgage,” says Rodney Jago, a relationship manager of Medfin, which specialises in funding veterinary practices. “Next, look at the payback period for the loan, and what are the tax benefits under each type of finance and its effects on cash flow. Each of these options has the ability to align repayments according to cash flow.”
As you look at your long-term business objectives, consider the three options:
- Finance lease: The equipment is owned by the finance company so the lease payments are a mixture of interest charged and the write-off of the value of the equipment.
- Chattel mortgage: You take ownership of the equipment at the time of purchase. As security, the bank takes out a mortgage over the equipment with ASIC [Australian Securities and Investments Commission]. Not only does this offer lower interest rates, it also provides a tax deduction. You can claim depreciation, running costs and interest paid against your business income. It allows businesses to claim a full input tax credit from GST incurred expenses next time you fill in your BAS statement.
- Commercial hire purchase: Another finance loan, but this time you hire equipment for a fixed monthly repayment over an agreed period. When your contract term is finished and you’ve paid in full, you own the equipment. Like the chattel mortgage, the business can claim tax deductions on the depreciation of the asset and interest charges.
Making a commitment
The number-one thing to keep in mind when deciding how to finance equipment is to always stay profitable, according to Sam Bowden of United Vet Group. “The biggest mistake I see practice owners making is over-capitalising, then spending the next five years struggling to pay back leases and debt. The purpose of a business is to give you a life, not have it take yours,” he says.
“Big debt causes a huge amount of stress and it impacts the mindset of the business owner, which is key to the overall health of the practice, team and clients. I’d prefer to wait on getting that flash piece of equipment until the business can pay for it,” explains the veterinarian mentor.
Whether you’re planning to finance your next equipment through a chattel mortgage or finance lease, it’s important to consult your tax accountant to consider if ownership of the asset is a source of value to your business operations. This will help determine which finance method will best suit their business.
Jago says, “It is crucial that you do not take on unmanageable debt. Maybe stepped repayments are the solution, where they are low in the early stages and increase over time. As the cash flow improves, the business will grow.”
Why leasing is right for you
One of the positive aspects of leasing your equipment is that it allows your business to free up cash flow and maximise its tax deductions.
Wister Wu, a healthcare finance specialist at Finlease, points out why financing high-end equipment can improve your business. “The cheapest way to purchase equipment is always by cash. However, paying cash for high-end equipment is a substantial upfront expense for the business and this can really limit its flexibility to grow.”
He explains thata business with limited cash flow has difficulties growing as it must first prioritise its funds for operating expenses, such as wages and rent. “It’s vital for growing businesses to be able to meet the demands of its customers,” he says. “Freeing up cash flow by leasing will make the decision to invest in that next equipment purchase all themore easy.”
While you may assume that one of the beauties of leasing is that if it breaks, it’s up to the supplier to fix it, this may not be the case. Wu points out that whether it’s a lease, chattel or commercial hire purchase, the lender will require you to organise insurance over the goods to cover any potential damage.
Bowden has a simple rule when deciding on leasing or buying. “Don’t do it unless it winds in profit,” he says. “You don’t want something to take three years to be profitable. I want it to be profitable by day one, which is why leasing can be a great way to make money from the get-go.”
“Big debt causes a huge amount of stress and it impacts the mindset of the business owner.”—Sam Bowden, United Vet Group
Why purchasing is right for you
Low interest rates are another positive. When negotiating with the bank, the loan should have a fixed term with an ability to pay off your loan early and redraw additional funds paid in advance.
“When purchasing equipment, asset finance is a common funding option,” says Jago. “If many items are needed, Medfin has a ‘Draw Down’ facility that enables multiple purchases to be made without affecting cash flow. When all purchases are completed, one neat fixed rate loan can be established—a simple solution.”
Structuring a repayment schedule that suits your cash flow is the first stage of the process. It’s common for vet practices’ sales to rise during summer, due to flea season and boarding services, so you can choose to make more repayments at this time. Meanwhile, during winter, your repayments would be adjusted accordingly to suit the slower period.
Wu comments: “When a vet decides to purchase a new ultrasound or X-ray machine, it’s with the intention of growing the business. As the business grows as a result of the additional revenue generated by the new equipment, not having all their cash tied up allows them the confidence to continue growing the business steadily.”
It’s important to look at other costs while paying off the loan. Room modification and maintenance all need to be included in the calculations.
Overall, equipment should be considered a long-term investment, rather than an expense. It will boost your functionality, expand your capabilities, and help your business grow. Whether you decide to buy or lease, financing will have an impact on the success or failure of your practice. Before committing to a method of finance, get advice from your accountant, your bank, your business partner and your practice manager as to what’s best for you.