Leasing versus buying
If you’re starting a new practice or working to expand your current practice, you may be trying to keep your cash expenditures as low as possible to ensure your practice can meet its debt obligations and daily operating costs while you grow your patient base and increase collections.
For some dental practices, leasing may be a good alternative to financing a purchase with a loan or line of credit. Leasing may allow you to conserve cash.
A lease is a contract that obligates your practice (the lessee) to make periodic payments to the lessor over the span of a lease term. Leasing falls into two major categories:
- Equipment leasing, which includes dental equipment, office equipment such as computers and printers, waiting room furniture and more.
- Real estate leasing, which includes office space and parking lots. Real estate leasing can also include sale and leasebacks, which occur when a company sells real estate and leases it back from the new owner.
There are two major types of business leases
An operating lease often allows you to make smaller periodic payments than you would with a term loan. Operating lease payments are structured based upon a balance remaining at the end of the lease term, whereas a traditional loan is typically fully paid off by the end of its term (or fully amortized). This lease structure can allow for smaller payments than those required on a loan. Additionally, a lease can provide your practice with options. The leased equipment has a residual value (i.e. the amount you can buy the equipment for) at the end of the lease term. In addition to the option to purchase the equipment at the residual value, the lessee may have the option to renew the lease or they may decide to terminate the lease and return the equipment.
An operating lease requires the lessor to service and maintain the equipment. The costs for these services are added to the lease payments. An operating lease also allows the lessee to cancel before the end of the lease term.
A capital lease involves periodic payments over the span of the lease, paying the lease off in full by the end of the lease term. Capital leases provide the lessee with tax savings earned on the depreciation expense of the equipment. At the end of the lease term, the lessee owns the equipment or faces a much smaller residual value. Because capital leases are considered equivalent to loans, you’re required to show any capital leases on your practice’s balance sheet.
Lease versus buy analysis
While leasing offers certain advantages over buying, there are trade-offs with either decision. That’s why it’s a good idea to conduct a lease-versus-buy analysis first.
With leasing, you get the benefit of smaller payments and flexibility that comes with not owning the equipment for longer than you wish. Buying, however, has advantages that come with ownership. Consider working with a financial professional to evaluate your return on investment by running a discounted cash flow (DCF) analysis. This will help show the expected cash inflows and outflows of either financing decision.
Mr. Dewart is director, U.S. Healthcare Programs for BMO Harris Bank’s Metropolitan Banking division. BMO Harris Bank is endorsed by ADA Member Advantage as the preferred financing for ADA members. Mr. Dewart oversees portfolio growth and new business development, key program strategies and industry partnerships. He has been a commercial banking professional since 1997 and worked with a focus in the health care industry since 2006.
Note: We recommend practice owners consult qualified professional advisers for legal, finance, accounting and tax guidance when considering starting or acquiring a practice.
The opinions, estimates and projections, if any, contained in this article are those of the author. BMO Harris Bank endeavors to ensure that the contents have been compiled or derived from sources that it believes to be reliable and which it believes contain information and opinions which are accurate and complete. However, the author and BMO Harris Bank take no responsibility for any errors or omissions and accepts no liability whatsoever for any loss (whether direct or consequential) arising from any use of or reliance on these articles or their contents. These articles are for informational purposes only.