When it comes to financing medical spa equipment, which route should you take?
If you’re considering expanding your practice with a medical spa, you have a lot to think about. You need to hire the right staff, market the facility and choose the right equipment.
When it comes to equipment, patients want the latest and greatest technology to turn back the hands of time. This will require a heavy financial investment on your end.
Should you buy or lease? This question isn’t easily answered, unless you take a hard look at both options. This article discusses the factors you need to consider before deciding whether to lease or buy. These are the economic value of the equipment, the availability of capital, the flexibility of payment terms and the potential tax benefits.
Economic value of the equipment. When making the lease vs. buy decision, you need to think about the life span of your equipment. Your patients, no matter how loyal, aren’t going to come to your med spa if your equipment is outdated. They’re paying top dollar for treatments, and they want results. That means you need the latest technology. This is where leasing may be a valuable option.
As a general rule, you should lease equipment that will depreciate quickly. Lasers, IPL, cellulite reduction and microdermabrasion machines are candidates for this option. Because their value at the end of the term is going to be low, you want to use these machines while they have a justifiable economic value, then move on to a newer technology.
For example, by getting a new laser that has twice the spot size of your existing one, you should be able to reduce the time it takes to do certain procedures. The equipment will allow you to increase the number of procedures you can do in a day, thereby increasing your daily revenues. The increase in procedures should more than compensate for any increase in monthly lease payments.
Leasing also removes the risk of your getting caught with obsolete medical spa equipment because you can upgrade or add equipment to meet the growth of your med spa. With leasing, you have the option of ownership at the end of the term. By buying the equipment, you own it outright.
Availability of capital. It’s no secret that med spas are expensive to build. We’ve found that most med spas cost $450,000 to $650,000 to develop, build, market and equip. Most physicians will, therefore, require additional financing to make their medical spa a reality.
When choosing what you’re going to finance, select equipment that can be used as collateral. The obvious items are the larger devices, such as IPL, laser, microdermabrasion, LED phototherapy unit and skin analysis equipment. But you can also lease the phone system, computers, software and the furniture. You cannot lease intangible items, however, such as payroll and inventory costs.
With leasing, you also can finance the associated equipment acquisition costs, such as delivery charges, installation costs, taxes and additional training. Leasing also offers the lowest startup costs. You only need one monthly lease payment to start a lease.
When you pay cash or obtain a loan for equipment, you’re paying in after-tax dollars. Lease payments, on the other hand, are made with pre-tax dollars. In the end, it comes down to cash flow management. If your cash is limited, you need to protect it.
A new med spa is like any other new business; it’s going to take time to build your clientele, and you’re going to experience unexpected expenses. So make sure you don’t experience a shortage of cash after you open your doors. It’s critical to maintain an excellent credit history. If you miss a payment, you can seriously affect your credit history and ability to borrow for many years.
Even if you have the capital, you’ll need to decide whether this is the best investment for your money. If you put all your eggs in one basket, you may not be able to invest in other opportunities that might offer a better rate of return. Why invest your cash by purchasing a laser that will depreciate in value immediately, when investing in a real estate opportunity could reap bigger rewards?
Flexibility of payment. When starting any new business, especially a med spa, you need cash to cover unexpected expenses that may arise.
We find that many med spas start to break even within six months, so having six months of deferred payments is a popular leasing option. This program basically defers any regular lease payments for six months. This helps with cash flow -planning, giving physicians an extra cushion.
Some other lease programs include a 90-day deferred payment plan (regular payments start 90 days after the equipment is installed), step payments (payments gradually get larger every month for the first year), and skip payments (allows you to miss payments at pre-determined times throughout the term).
When you purchase your med spa equipment outright, you own it and are responsible for it. In a lease, you usually have the choice of ownership at the end of the lease term. Purchase options can range from $1 to FMV (Fair Market Value). FMV is necessary if you intend to have your lease treated as a monthly expense. Often, FMV works out to be 5 percent to 15 percent of the original equipment cost, depending on the term of the lease.
Potential tax benefits. Leases can be classified as either operating or capital. With an operating lease, the leasing company owns the equipment and rents it to you. The IRS may consider it to be a tax-deductible monthly expense, not a purchase. So you can immediately deduct the lease payments against your corporate income. With this structure, you’re “renting” the equipment from the leasing company. This option is a good way to go if you want to use equipment without ownership. But you also want to return the equipment at the end of the lease and avoid technological obsolescence.
The operating lease is not considered a long-term liability. Therefore, it doesn’t have to appear on your balance sheet. This makes your liquidity ratios look much better, which is important if you’re planning to sell the med spa in the future.
With a capital lease, you’re the owner of the equipment. Therefore, you can take advantage of the regular and bonus depreciation expense provisions, including the Section 179 expense provision. With capital leases, you automatically purchase the equipment upon lease termination at a pre-agreed amount, which can be -anywhere from $1 to 10 percent to 20 percent.
Before committing to a lease structure, consult with your tax advisor. This professional will better understand your current tax situation and ensure you have the structure that best meets your needs.
Common Leasing Questions
Before entering into a lease, many people want to know the interest rate. Equipment leases are similar to landlord leases in that an interest rate isn’t disclosed, only a monthly payment. A lease is considered a “rental” of the equipment, not a sale. The revenue the equipment generates should greatly exceed the lease (rental) payment. If not, you need to re-evaluate whether the procedure, such as laser hair removal or cellulite reduction, is worth performing. If an interest rate is disclosed, it will not be treated as a tax/true (operating) lease, according to an IRS revenue ruling. Therefore, you won’t be able to deduct the entire lease payment.
While laser and light-based devices are the most obvious leasing choices, you can lease other equipment, including waiting room chairs and treatment tables. You may be able to lease these through each individual manufacturer, but you can usually save money (and make only one monthly payment) by combining all the equipment into one lease. The manufacturer may not like this, since leasing is often an additional profit center for them, but it’s beneficial to you.
All leasing prices are not the same. Certain factors will determine what your payment will be, including personal credit score and history, the time your practice has been in business and your overall financial strength. Most often, you’ll be asked to complete a credit application so the leasing company can run your credit bureau history and score. You also may be required to complete a personal financial statement, which gives the leasing company an idea of your net worth and collateral that may be available if your credit history is less than ideal.
Even if you have previous bankruptcies and paid off tax liens, you should be able to obtain financing. But be aware, it’s not going to be at the same pricing level as someone with a flawless credit history. If someone has a history of making slow payments and/or other serious issues, such as bankruptcies and tax liens, that person is more likely to default on lease/loan payments. Leasing companies know this and will take this into consideration.
Leases are generally rental agreements; you have agreed to pay X amount of money over X number of months. There’s no benefit to paying the lease off early. If your med spa is doing really well, you should take that cash and buy appreciating assets or think about expanding to a second location.
Med spas are expensive endeavors, and most physicians will require additional financing. Because most medical spa equipment becomes obsolete in a matter of just a few years, leasing may be a good option for you. Ultimately, the decision to lease vs. buy rests with you and your accountant.