Before you choose how to pay for a big piece of equipment, check your cash runway. Then compare the total cost of each option.
Start with your cash
New equipment is a cash decision first. Look at your bank balance after the purchase, not before it. If paying in full would drop you below the cash floor you set for the practice, pay a different way or wait. A new exam room won't help if it leaves you one slow month away from missing payroll.
If you haven't set a floor yet, start with how many months of cash runway you have.
Four ways to pay
Cash from savings. You pay no interest and sign no paperwork. It's the cheapest option, as long as you stay above your floor once the money is gone.
An equipment loan. A lender pays for the equipment, and you pay the lender back on a fixed schedule. The equipment usually serves as collateral. Some equipment vendors offer their own financing, and your bank may offer loans backed by the SBA. Treat every offer the same way and compare the total you'll pay.
A lease. You pay monthly to use the equipment. At the end you return it, renew, or buy it. Read the end-of-lease terms before you sign. Some leases end with a small buyout, and others ask for the market value at that time. A lease can make sense for equipment that goes out of date fast.
A business credit card. It's quick, and it works if you pay the balance off within a 0% intro period, or within a month or two. Carried for years at a card rate, it often ends up the most expensive way to pay.
Compare the total, not the payment
A lower monthly payment often means you pay more in total. In a made-up example, the equipment costs $9,000.
- Cash from savings: no monthly payment, $9,000 in total.
- Loan at 9% over 36 months: about $286 a month, about $10,303 in total.
- Card at 24% over 36 months: about $353 a month, about $12,711 in total.
The equipment is the same in all three. The card costs about $3,700 more than cash and about $2,400 more than the loan.
Turn the payment into members
In DPC, you can measure any monthly payment in members. If your membership is $75 a month, a $286 payment takes the dues of about 4 members. The card payment takes about 5.
Ask whether the equipment brings in, keeps, or saves at least that much each month. If you aren't sure what a member brings in on average, revenue per member walks through it.
Match the term to the equipment
I'd pay it off before you expect to replace it. A five-year loan on something you'll swap out in three leaves you paying for equipment you no longer use.
How each option shows up in your books
- Cash. The equipment usually goes on your Balance Sheet as an asset, instead of hitting your P&L as one big expense in the month you buy it. Your CPA decides how it gets written off for taxes.
- Loan. The equipment goes on as an asset and the loan as a liability. Each payment splits into principal, which lowers the loan balance, and interest, which is an expense. That split is one reason your P&L and your bank balance don't match.
- Lease. A lease gets recorded based on its terms. Send your bookkeeper the lease agreement so it's set up right from the first payment.
- Card. The purchase sits on the card balance until you pay it, and any interest is an expense.
- Your own money. If you pay from a personal account, it gets recorded as money you put into the business. Recording the money you put in covers how. The cleaner route is to move the money into the business account first, then buy.
Before you sign
- Your cash stays above your floor after the purchase or down payment.
- You compared the total cost of at least two options.
- You know how many members cover the monthly payment.
- You read the end-of-lease terms, or asked the lender about a prepayment penalty.
- You bought it on a business account.
- Your bookkeeper has the invoice, the agreement and the payment schedule.
Common questions
Should I pay cash or finance it?
If cash keeps you above your floor, it costs the least. If paying cash would leave you thin, a fixed loan payment protects your runway. Compare the totals either way.
Can I write off the whole thing this year?
That's a tax question for your CPA. Give them the invoice and the date the equipment went into use.
Does it matter if I buy it on my personal card?
Yes. It mixes your money with the practice's and makes the purchase harder to track. Keep the purchase on a business account.
Want your runway in front of you every month?
Cash flow forecasting is part of our Fractional CFO level, and every client gets clean monthly numbers by the 15th to figure runway from. If that sounds useful, apply to work with us.