Whether you’re opening a new dental practice, or looking to grow an existing one, managing your month-to-month cash flow is an important element to running a successful business. This means you’ll constantly be looking for ways to keep expenses in check ensuring you’re able to meet your debt obligations, pay your overall daily expenses, while also being profitable.
One of the key decisions you’ll have to make centers around equipment and whether you should lease or finance/buy the equipment. Just like you can’t run a dental business without cash flow, you can’t run a dental business without equipment.
A look at the options:
When we refer to leasing, we are referring to what is called an operating lease. This is the traditional style lease you might be familiar with from the automobile industry. Essentially with a lease, you are renting the equipment and will pay a flat monthly amount over the term of the lease. An operating lease typically comes with smaller payments because the equipment is not being paid off by the end of the term. At the end of the term, the equipment has a residual value, which is the amount for which could purchase the equipment outright. A lease will often come with the option to renew, or you can terminate it altogether and return the equipment.
Finance/Buy (Term Loan or Capital Lease)
Be careful to not confuse the term capital lease with an operating lease. A capital lease is essentially a term loan which is why we’ve included it in the finance section.
A term loan/capital lease requires periodic payments over the term, with the key difference being that at the end of the term, the equipment is owned outright and is fully paid for. Because the loan is paid off, the option to finance comes with higher payments upfront, but no further payments beyond the term. The equipment is now yours to continue using or to sell if you wish.
Lease vs Finance/Buy Decision
Before deciding it’s important to conduct a lease vs buy analysis so you have a good understanding of what the quantitative factors or the numbers look like. This is where relying on an accountant or financial planner can be helpful as they’ll have a good understanding of things like cash flow, the time value of money, and how taxes influence the true costs of either option.
Leasing offers the benefit of smaller payments along with flexibility because you’re not forced to own the equipment any longer than you’d like to. You’re also better able to stay up to date with fast-moving technology. Financing usually ends up being cheaper over the entire life of the asset but requires more cash upfront. The longer the life of the asset, typically the better financing will be.
There is really no one size fits all answer here. Each option comes with its benefits and trade-offs. Some of the major factors that will influence your decision will include your balance sheet (company net worth), cash flow, the life expectancy of the equipment, and your own opportunity cost. Many of which are individual to you. In the end, don’t be afraid to engage your financial professionals to help with this decision and to outline the trade-offs. It’s what we're here to do.
- Brandt Butt, Portfolio Manager/Investment Advisor, CIM®
Brandt is an Portfolio Manager/Investment Advisor and part of an award-winning team at Endeavour Wealth Management with iA Private Wealth. Brandt’s focus is working with incorporated physicians and dentists between the ages of 35-45 who are looking to set themselves up on the right financial path in hopes of reaching a point where they are choosing to work, instead of having to.
This information has been prepared by Brandt Butt who is a Investment Advisor/Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor/Portfolio Manager can open accounts only in the provinces in which they are registered.
iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
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