Businesses are ramping up to meet increasing demand and market opportunities in response to continued signs of economic improvement. Acquiring equipment to operate and grow is critical, and for smart healthcare businesses and providers, equipment financing is a key acquisition strategy. Equipment financing is tailored to individual business considerations, including that of maintaining cash reserves.
The current market situation finds equipment financing as vital and available as ever, enabling healthcare organizations to secure the assets they need. Equipment financing provides many benefits that fit the operational and financial objectives of all types of organizations, from Fortune 100 corporations to one-person operations. A deeper understanding of these benefits will enable healthcare organizations to strategically leverage equipment financing not only during improving economic conditions, but for any business cycle.
In the healthcare sector, increasing activity is expected, with a fair amount of pent-up demand unleashed as providers look to make planned purchases that were delayed amid the challenging economy.
“Healthcare IT, including electronic medical records (EMR) is the major growth area for 2011,” said Steve Riggs, President, Global Healthcare and Clean Technology, De Lage Landen.
“Hospitals and physician practices are moving to achieve the necessary ‘meaningful use’ standards in order to qualify for stimulus funds under the HITECH Act. While stimulus funds are designed to offset the cost of implementing EMR and associated technologies, in a traditional capital budget scenario the provider must front all of the money for the system while the stimulus funds are paid out over time. That makes equipment financing an attractive option because it allows providers to pay over time—which is the same way they will receive the stimulus funds,” Riggs added.
Therefore, in addition to pent-up demand, a large focus will be on acquiring healthcare IT systems necessary to achieve meaningful use. This is due to the stimulus funds available now, combined with potential penalties for non-compliance looming in 2015, which have made this a priority for most providers.
The healthcare equipment finance environment is improving, and end users should be strongly considering equipment finance. It is important to understand, however, that the changes and uncertainty surrounding healthcare legislation and reimbursement are affecting access to liquidity. But while credit conditions have not returned to pre-recession levels, the situation has clearly improved compared to 12 or 18 months ago. Hospitals and physicians with solid credit histories can generally expect the environment to be competitive.
Increasing activity and optimism prevails in equipment finance overall. The Monthly Confidence Index for the Equipment Finance Industry, which reports a qualitative assessment of prevailing business conditions and future expectations, reached its highest level in March 2011 since the index originated in May 2009. The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index, which reports economic activity for the $521 billion equipment finance sector, showed new business volume for February 2011 was up 28% over the same period last year.
Despite the tangible gains businesses are experiencing, economic recovery is being hampered by unemployment, the housing market slump and durable goods data, among other issues. A Duke University/CFO Magazine Global Business Outlook Survey noted that CFOs are concerned about consumer demand, pressure on profit margins and the difficulty of planning during uncertain economic times, with half of CFOs planning to hold onto cash.
These are conditions that are well-suited for equipment financing, since they:
- enable expense planning
- maintain cash flow
- preserve capital
- require no down payment
- can provide 100% financing
The flexibility of equipment financing, especially leases, is another key benefit that can enable customized solutions for a business’ accounting, tax or cash flow needs. Leases are available that allow for seasonal business fluctuations, lower monthly payments while a project is ramping up and the equipment is not yet generating revenue, and other specific circumstances a business may experience.
For healthcare providers thinking in terms of deploying capital, projects can become a choice between one acquisition over another. However, a benefit of equipment finance is the ability to spread the cost over time. So if adding or upgrading an electronic medial record is a priority, for instance, it doesn’t mean having to postpone adding or replacing medical equipment elsewhere in the facility.
Advantages for All Business Cycles
In addition to the market-sensitive considerations that make equipment financing attractive to businesses, there are seven operational advantages that provide benefits in all economic cycles:
1. Access to Equipment Expertise—Many equipment finance companies have special relationships with manufacturers and distributors. This expertise also enables the best possible lease payment terms since their knowledge and experience with various equipment types allow equipment finance companies to accurately set the residual rate—the value of the leased equipment at the end of the lease term—for your equipment type.
2. Equipment Obsolescence Management—Funding equipment such as IT, communications and medical/healthcare equipment through leasing, loans or other financing arrangements helps manage equipment obsolescence by enabling updates. Certain leasing finance programs can allow for technology upgrades or replacements, so the risk of being caught with obsolete equipment is lower with leasing than with other equipment acquisition methods.
3. No-Hassle Equipment Disposal—Financing also allows upgrading without having to manage equipment disposal and other ownership burdens. Particularly with computers and other technology devices, disposal can be a complicated issue, governed by federal, state or local regulations, which equipment finance companies are well positioned to handle.
4. Better Risk Management for Risky Times—The risk of equipment ownership is a consideration for all healthcare leaders regardless of business cycles. Investing in large capital expenditures represents a big financial risk, especially to smaller hospitals. Even with low interest rates that make purchasing attractive, the potential consequences of ownership can erode the upfront benefits. Risks incurred from managing assets, such as inconvenience, inexperience, obsolescence and loss of profitability can be dramatically reduced through the transfer of equipment ownership to the equipment financing company. Financing removes many unnecessary risks, allowing hospitals and health systems to focus on their core competencies.
5. Outsourcing Equipment Management—Hospitals and health systems have cut back staff over the last few years, and most lack the resources or knowledge to efficiently manage and sell their old equipment and purchase new. The convenience of having equipment managed by a third party, such as an equipment financing company, essentially outsources the equipment management function.
6. Valued Equipment Consulting—Most importantly, the equipment financier can be considered a valued consultant, providing additional benefits through lifecycle asset management solutions. Financing companies can provide dependable asset management, which helps businesses track the status of equipment, schedule upgrades, and receive full equipment lifecycle services from installation to disposal.
7. Equipping Business for Success—Equipment leasing and financing plays a significant role in helping all types and sizes of commercial businesses in the United States to acquire the equipment they need with increased flexibility, regardless of business conditions. The role of the equipment finance industry in funding the capital expenditures businesses need to operate and grow contributes not only to businesses’ success, but to U.S. economic growth.
William G. Sutton, CAE, is president of the Equipment Leasing and Finance Association.