HOW TO FINANCE CAPITAL PURCHASES

 

 


Q:  My practice needs to purchase some much needed equipment in the near future.  Should I lease, borrow, or pay cash?

 A:  This question will be asked at some time by virtually all practices.  The answer is not always so simple.  Capital asset financing methods chosen will vary depending on how the practice is organized, the strength of the practice’s financial structure, and the implicit interest costs of the financing option.

 A practice may elect to pay cash for equipment purchases if they have developed a cash balance larger than that needed to finance its day to day operations.  In addition, if the practice has elected to build its asset base larger than its respective liabilities, such a decision may be quite in line with this type of asset purchase philosophy.  A practice considering this option should check with an accountant knowledgeable about the tax aspects of this type of asset financing.  For example, current federal tax rules allow the deduction of capital equipment purchases up to $100,000 for capital purchases made during 2003.

 Other practices may finance the purchase of large asset purchase through the use of leases or loans.  Which financing vehicle is used by the practice will in large degree depend upon the cost of capital (implicit interest cost) for the borrowed funds.  Leases are designed in two basic types, capital and operating.  An “operating” lease is one whose payment deducted from income as paid, and is usually not recorded as a liability on the practice’s balance sheet.  It may have a payoff balance at the end of the lease larger than the fair market value of the asset being purchased.  A “capital” lease is a one that “acts like” a loan.  The payoff balance at the end of the lease is usually less than fair market value.  Execution of this lease is usually recorded on the balance sheet similar to a loan with both the asset and the liability being booked.  Lastly, the practice may find the use of a traditional loan to be the most cost effective solution of financing the purchase.  In all of these options, the practice should choose the financing option that is the lowest “net present value”.  That is, the total of all payments made should be discounted back to “today’s dollars”, to compare which one is the least expensive.  The practice may use software programs to calculate the net present value of all options, or seek advice from a competent CPA.

 

 
 

 

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