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Equipment Financing Rules to Live By
7 simple steps to get the best deal from your lender.
Edward Tennant
Publish Date: October 10, 2007

When it comes to equipment financing, there are tried-and-true rules, such as match your financing terms with the life of the equipment. If you expect that new anesthesia machine to last you five years, do the financing for five years. That's good, but I follow my own financing rules. See what you think.

1 Don't rely solely on the local bank. You can check with the financial institution that handled your initial long-term debt at startup. But this may not result in the best offer for financing your equipment. Why? Because while banks can assess risk in terms of your business model, they have little experience in surgical equipment financing. They'll make you jump through more hoops than a more established healthcare lender. They'll want to understand how you'll use the equipment and how you'll generate new revenue with the equipment to pay for it. This leads to more questions and paperwork explaining your billing and collection processes and revenue projections. All of the extra work your financial institution does researching the loan has to be paid for and will likely end up in origination fees and a higher interest rate.

2 Set goals for what you want in your finance agreement. Study the marketplace and you'll find that every equipment loan to a surgical facility isn't viewed as a high-risk loan and shouldn't be burdened with excessive interest and fees. Surgery centers are now finding healthcare specialized lenders that will write loans at just above the prime rate. Should you lease the equipment with a $1 buyout at the end, which often doesn't protect you if the equipment becomes somewhat obsolete over the term of the lease? Should you lease with a 10 percent purchase option that would let you upgrade or renew the equipment at the end of the term? You need to consider your needs and set goals for the agreement. Can you pay off the loan early? If so, are you penalized or is there a benefit?

3 Personal guarantees are a way of life. Despite the outpatient surgery industry's relative good health, lenders know that some businesses will fail due to unforeseen circumstances or mismanagement. Most lenders, if not all, require that partners complete personal guarantees. Should you find a lender that doesn't, never let it go.

4 Look at all the new faces. Several lenders have developed great expertise in lending to surgery centers. Many healthcare-specific lenders appreciate the positive financial environment in which most centers operate. They understand our industry and have streamlined the process for approving equipment acquisition loans and leases.

5 Read the fine print. I know you don't want to read the fine print because it hurts your eyes. However, avoiding eye strain can be expensive. You may even want to pay your lawyer to review the agreement. If you're taking a loan or a lease for a significant amount, the lawyer's cost (perhaps a few hundred dollars) to review the financing documents could be far less than the cost of some overlooked provision. If you're financing a piece of equipment worth several thousand dollars and the agreement involves use of consumable products or other restrictive terms, you could lose much more than what it costs to have your lawyer review the agreement.

6 I need insurance? Standard lease and loan agreements require property insurance that protects the equipment against loss, damage, theft or destruction. For leasing, lenders will also likely require liability insurance that protects the lessor against legal claims based on use of the equipment by the lessee. The contract normally indicates your requirements to provide notice of coverage per their terms. When you don't, the finance company will provide the insurance, usually at a much higher cost. While we're talking about insurance, verify whether you have a valuation method of "replacement cost" or "actual cash value." In the event of loss, replacement cost ensures that you receive adequate funds to replace the lost equipment with new equipment. Actual cash value offers only the depreciated value of the equipment at the time of loss.

7 Shop till you drop. You'd be shocked at how many lenders want your business. So why not create a little competition? Let lenders know you're gong to shop the interest rate and terms, that you're interested in negotiating and that the first offer is not the one that you're going to sign. Remember, lenders need us more than we need them. For example, if a manufacturer's lease option will penalize you for failing to purchase sufficient consumable supplies and other unwanted terms, tell the company you'll be shopping for a loan elsewhere. On the other hand, I've heard administrators who've been pleased with leasing from the manufacturer because they have recourse if something goes wrong and they've tied in service agreements with the leased equipment.