Twenty-five years ago, Martin Zimmerman was a young engineer and entrepreneur taking his first steps into the equipment leasing and finance industry in Chicago. It seemed appropriate, then, for him to adorn his walls with images of buildings fresh from the drafting tables of local architects. The renderings of new designs paralleled the start of his own business, and together, the two represented not only his primary interests but also his attention to building on his strengths and expertise.

With this expertise, Zimmerman, now president and CEO of LFC Capital Inc (Chicago), has enabled healthcare providers to profitably build their businesses by offering a host of financing options for the medical equipment they need.

Many facilities and radiology groups in the market for imaging equipment are looking for ways to better manage the financial challenge of this aspect of asset management, and they’re investigating leasing and renting options.

But why not buy? According to those in the industry, the reasons are many and involve such factors as flexibility, cash flow, efficiency, and convenience.

“Leasing is the most attractive option in the healthcare field right now,” says Robert A. Weir, VP of Wells Fargo Equipment Finance Inc (New York). Wells Fargo offers a number of leasing and loan products, but most popular is the fair market value cap lease. With such a lease, the lessor assumes that the equipment will have a certain value at the end of the lease term, at which time the borrower can take one of the following actions:

1. purchase the equipment for the fair market value;
2. continue to lease for another 12 months (and then return the equipment, buy it, or renew the lease); or
3. return the equipment to the lessor and “walk away” or upgrade to a newer model.

“The lessee, therefore, has the ability to shift the end-of-term equipment risk to the finance company,” Weir says.

Zimmerman adds, “Radiologists must decide whether they want to invest in the equipment, which will immediately begin depreciating, or invest in an appreciating asset, such as the business itself. An advantage of leasing or renting rather than buying is that you free up capital for other purposes, and you can fix your costs at a reduced level during the primary useful life of the asset.”

In addition, says Rick Staab, president of Intermed (Alachua, Fla), “Leasing allows you to spend more on equipment but spread the cost over time. For instance, you might not have the cash to buy an ultrasound machine for a couple hundred thousand dollars, but you can lease the equipment for, say, $10,000 per month and make a profit.”

Paying the Rent
Facilities also should consider the advantages of renting rather than leasing. “Renting makes sense for facilities that need certain equipment to meet demands over several months of the year or an overabundance of patients at specific times,” Staab explains. “They can acquire a portable ultrasound unit, for instance, and not be obligated to a huge expense because the rental can be on a month-to-month, quarterly, or semiannual term.”

However, keep in mind that with a short-term rental, the cost will be higher. “The monthly cost is often higher than with a long-term contract because the owner, or lessor, is taking on most of the risk; the user, or lessee, has the option of returning the equipment long before it is paid for,” Zimmerman observes. “However, it can be useful to rent despite the higher rate if you can make money using the rented equipment and want to minimize your commitment.”

His example is a new imaging center that wants to build computed tomography volume with low risk before committing the high six-figure sum needed to acquire the latest state-of-the-art multislice unit. “Rentals might cost more per month,” he warns, “but the total commitment is almost always less than other alternatives.”

Zimmerman says that renting is also a desirable option for hospitals that are changing equipment and want to minimize downtime, small institutions where demand for imaging services is limited, facilities that need a backup system, and users who believe the risk of obsolescence is too high for a longer commitment. “The major advantages of leasing or renting are reducing both cost and risk,” he reminds clients. “With an operating lease, you can significantly reduce out-of-pocket payments over the lease term, because by definition, the present value of the lease payments must be less than 90% of the equipment cost.

“In this case,” he continues, “the lessor invests the equity because usually, new equipment is not paid back in full for 5 years or longer. In effect, the lessor is assuming a good part of the risk of obsolescence, since he is paid back last. All forms of traditional financing obligate you to pay back more than the 100% you borrow to acquire the equipment.”

Mark Sedlmeier, VP of sales for GE Healthcare Financial Services (Chicago), agrees that radiologists must match the expense of acquiring the equipment with the revenue that they will acquire from its use. “There is a large benefit to cash flow with a leasing option,” he says. “Because radiologists get paid for using the imaging equipment, not owning it, they might not want to assume the risk of obsolescence. With a lease, the technological risk is passed on to the lessor, so it is a good way for radiologists to ensure that they keep abreast of changes in technology.”

How does leasing compare with purchasing? “If you are comfortable in your belief that the technology is not going to change much and you plan on retaining the equipment—for example, a basic X-ray machine—for longer than 10 years or so, then purchasing makes sense,” Sedlmeier says. “From a cash-flow perspective, if you have plenty of cash and would rather not have future payments, then go ahead and buy. But if cash is tight, then leasing is your best bet.” Another factor, which might be less of an issue for individuals than for practices, is that a lease need not be reported on financial statements as a liability.

In addition, says Ken Seip, VP of sales and marketing for MarCap Corp (Chicago), “Sometimes physician groups are, for instance, opening an imaging center, and they consider financing such a large capital expense with their bank line of credit. However, if they use that line for equipment, they might end up exhausting it, thereby limiting their borrowing capabilities for working capital, real estate, or future expansion.”

Careful Considerations
Once a radiology facility has decided to work with a leasing company, what sorts of questions should it pose, and what factors should it consider in choosing a financing source?

First, says Weir of Wells Fargo, the facility should ask how much it can afford to buy or lease on the basis of current revenue and projected revenue with the desired equipment. Another consideration is the typical turnaround time for credit approval. “Seven to 10 business days would be reasonable, but, of course, some approvals are faster, depending on the scope of the project,” he notes.

Especially for larger projects, Weir says, ask about interim or project financing; the ability of a finance company to make the down payment and progress payments is valuable for clients, who are then able to preserve their capital. Similarly, for large installations or new facility projects, Weir says clients should determine whether turnkey financing is available for the build-out costs.

“Make sure you understand the length of the lease term,” he recommends. “Ask whether you have a choice of 3-, 5-, or 7-year terms, and consider which one you would be most comfortable with.”

Another important factor in choosing a leasing company, Zimmerman says, is “good service—it’s a minimum. However, knowledge by virtue of specialization in the healthcare field is an important consideration. It’s always reassuring to speak to someone who understands your needs. And experience is a key differentiator; someone with experience as well as familiarity with the healthcare field might be able to save you more money over and above a low lease rate.”

Zimmerman offers a case in point: “Assume you choose a 5-year operating lease because the cost is the lowest, and you are working with a knowledgeable and experienced lessor. But your preferences change at the end of 3 or 4 years, and you want to switch to a faster and more efficient system provided by another supplier. Ordinarily, you would have to pay most of the balance due on the original lease or add it to the new lease on the new equipment. However, if you have the cooperation of the lessor and he is both knowledgeable and willing to do some work, you might not be forced to pay the balance of the original lease or add it to the new lease.”

If the lessor knows the market, he might be able to sublet the existing equipment for the remainder of the term. “So it pays to find out if your lessor is likely to be more than a source of low-cost capital,” Zimmerman advises. “Low cost alone is surely not bad, but low cost as well as knowledge and experience is better.”

Sedlmeier also offers some suggestions. “Of course, you’ll want to get competitive bids, but also ask about the scope of financial products that the company has: Does it offer a variety of options that will meet your needs appropriately? In addition, is the lessor informed and educated about the healthcare industry? Does he understand radiology, and is he knowledgeable about the equipment? Does he have good insight about the market?”

Seip—whose company, MarCap, has served healthcare providers for 30 years—advises clients to delve even deeper. “Healthcare is a unique niche within the leasing community, and you’ll want to consider how long your potential funding source has served that niche. Ask the company for references from radiologists so that you can prove it has been successful in this specialty for some time.” In addition, he says that it is important to gauge the company’s financial strength and investigate how it will fund the transaction.

Clients interested in leasing, Seip explains, need to know exactly what it is they want and need. “Especially for large projects—more than $1 million, for example—the leasing clients need to understand their sensitivities with regard to the financing requirements. A radiology group opening a new imaging center, for instance, might want to balance its desire for the lowest interest rate available with providing guarantees to repay the lease, a typical requirement for the lowest interest rate offerings.”

Sedlmeier adds that clients should ask about the end-of-lease options, such as whether they will own the equipment outright, can purchase it at a predetermined cost, or can return it. “What you want is to develop a working relationship with someone who understands your business. A financially sound lessor committed to the healthcare industry will understand the market and be a reliable partner rather than simply transactional. A bank lender might say no to an upgrade because they have elected to exit the healthcare market, or they might not understand the value of the upgrade,” he explains.

Finally, look for the conveniences of the leasing arrangement. “Always ask about the warranties on the equipment and whether you can wrap in an extended warranty agreement with the lease. You also need to determine whether the company offers service,” reminds Intermed’s Staab. “About 80% of our business is service related; we can service anything we sell, lease, or rent.” It might be wise to ask whether the company offers pre-owned/used or demonstration models, he suggests. “Often these [can be] like new but will be significantly less expensive,” he notes.

Weir concurs, adding, “The finance company could have assets that are coming off lease and will be available for sale. Another client is then in a good position to pick up equipment at a good price.”

The Players
What types of facilities typically seek leasing arrangements? “All types of hospitals, clinics, and physician groups,” Zimmerman reports. “Anyone interested in saving money and optimizing return on investment will be interested in a lease. If you need capital for growth, you want to pay out as little as you can for equipment—it’s just like wanting a low interest rate on a home mortgage with a low monthly payment.”

Seip, who says that MarCap traditionally handles projects involving at least $1 million in equipment, notes a trend in physician groups opening their own outpatient imaging facilities, thus increasing the demand for leasing options for equipping these centers.

Staab says his company works with a broad range of facilities, from small rural clinics to teaching facilities to large urban hospitals. “What they all have in common is that they might not have the capital to tie up in a purchase, especially if they want to upgrade and go with PACS or digital,” he says. “They are interested in leasing because they can have more equipment for less money per month.”

But as Sedlmeier points out, some facilities would rather have the tax benefit of owning the equipment, which, for them, might be more advantageous than a lower payment.

Weir agrees, adding, “With depreciation of its assets, a facility can lower its tax liability. Conversely, by leasing equipment, a facility can take advantage of the voracious tax appetite of a finance company. It is a mutually beneficial financial arrangement.”

As Zimmerman advises, both operating leases and capital leases have tax benefits. In the former, the lease payments are deducted; in the latter, you deduct depreciation on the equipment and interest. But in the end, only profits are taxed. The key is to be profitable and generate a good return on equity. And therein lies the key to leasing decisions: Choosing to have a lessor invest in state-of-the-art imaging equipment could enable radiologists to invest more wisely in the success of their practice.

Aubrey C. Patrick is a contributing writer for Medical Imaging.