eye on equipment

Four Elements of Financing

Susan P. Tarrant

There are several financial elements to consider when contemplating a capital purchase for an in-house lab. To help, we’ve asked the experts at Vision One Credit Union and Univest Capital, Inc., about the important things to figure into your decisions.

LEASE OR LOAN

1 The following is a rundown of some advantages and disadvantages of simple interest loans versus lease packages.

LOAN: Will own equipment at end of term; interest rates disclosed; may realize savings with early payoff; no residual payment at end; may require up to 20 percent down payment; may require longer approval process.

LEASE: Usually 100 percent financing; no down payment required; equipment can be returned at end of lease (planned obsolescence); usually offers fixed interest rates; extra payment needed to purchase equipment at end; no savings with early pay-off.

INTEREST RATES

2 Disclosure of interest rates is not required with lease packages, unlike with installment loans. Some lessors may indicate the interest rate being charged. Others may instead break the financing into monthly lease payment amounts over the chosen number of years.

So how do you know exactly how much interest you’ll be paying over the term of the lease? Compare the sum of payments on the lease (including any residual payment) to the sum of the payments on the loan. That number will tell you which plan is offering the lower interest rate.

PREPAYMENT PENALTY

3 Paying off a debt early is what we all strive for, right? But we may not expect to get penalized for it. Ask about any early pay-off penalties associated with the financing you are considering, and then go one step further.

Just because a plan is offering “no pre-payment penalties” doesn’t mean that paying it off early gives you a financial reward. In fact, many lease agreements calculate the payoff amount with the full interest amount figured into the total cost; so, they get their full interest no matter how many months the lease is carried. With some simple interest loans, an early payoff means that you’ve paid interest only on the months for which you’ve carried the loan.

RESEARCH

4 Planning for a large capital purchase such as an in-house lab should be a careful undertaking. You shopped around and did your homework before choosing the edging or surfacing system you wanted, and you should do the same when determining how to pay for it.

The most common—and often costliest—misstep an ECP can make when preparing to finance a capital investment is to opt for the most expedient path to financing.

Take the time to ask questions, compare financing packages, and lay out the financial advantages and disadvantages of each. Make sure you understand all of the language of the contracts. Don’t go with simply the quickest path to acceptance.

And, as always, consult your financial advisor or accountant before entering into any contract. EB