Money Matters Investment & Finance Financing your practice
Financing your practice
Thursday, 01 June 2006
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dollarsign_TN.jpgFinancing your practice is not simply a matter of choosing the lowest rates. There are many financing options and working with an experienced company specialising in your business may save you substantial dollars.

The final cost of the structure that you choose will be governed by many factors including tax, how quickly you pay off the loan, interest rate, GST, and other fees. However, it is important to realise the final cost and interest rates may not correlate.

If you are considering a major refit of $80,000 plus $20,000 equipment, what are your options and what is the real cost of each option?

Your options include:

  • Lease
  • Asset Purchase or Chattel Mortgage
  • Residential Mortgage
  • Cash

Comparison of the funding options:

 

Lease

CHP or Chattel

Mortgage

Ownership

Financier

Borrower

Borrower

Payments deductible

Yes

No, only interest and depreciation

No, only interest and depreciation

Early Payout

Yes, with costs due to fixed rate

Yes, with costs due to fixed rates

Yes, depending if fixed or variable

Fees

Minimal

Minimal

Yes, usually monthly

Additional Security

Usually no

Usually no

Home

Residual

Yes

Optional

Optional

Fixed Rate

Yes

Yes

Usually no

 

Upon consideration of the loan structure, it is also important to consider the cost of each option. As mentioned, tax, the loan term, the rate, fees, and GST all play a part in assessing the cost. This is where it is important to choose a financier that will offer all alternatives. For example, many banks will not do a lease on fitout, which may be the most tax effective solution for you. In fact, how often are you made aware of what options exist and the cost effect on each?

Assessing your options

In order to asses the cost of each option, a net present value (NPV) calculation is done. It considers all the various cash flows and discounts them to a common value. For example, you may be better off with a higher interest rate but larger tax deductions.

In our example of $80,000 fitout and $20,000 equipment, and the finance paid off over 5 years with a 10% residual, the NPV for each option is as follows:

Lease                                       $44,968

CHP                                        $52,929

Loan (Mortgage)                     $51,953

Cash                                        $57,487

As can be seen for these assets, a lease is your best option due to the slow depreciation on fitout. This scenario can vary substantially depending on the nature of the equipment, e.g. computerised equipment may allow you to depreciate at a faster rate and therefore CHP may then be a better option.

Financing your practice is complex and choosing the best option may save you thousands of dollars. Make sure you speak to an expert financier that knows and understands your equipment, and can assist you in choosing the best option.

 

Richard Curia manages the Perth office of Experien. Richard has substantial experience in financing medical practices and is contactable on 1300 131 141.