How to Finance Diagnostic Equipment: A Complete Guide for Practice Owners
You've done your clinical research. You've run the numbers on patient volume and reimbursement rates. You know the new OCT, ultra-widefield imaging system, or other diagnostic equipment will enhance patient care and generate revenue for your practice.
Now comes the question that keeps many practice owners stalled: How should I pay for it?
The financing decision is just as important as the equipment decision itself. Choose the wrong structure, and you could strain your cash flow, pay unnecessarily high interest costs, or lock yourself into inflexible terms that don't match your practice's needs.
Choose wisely, and you'll acquire valuable technology while maintaining financial flexibility and minimizing total cost.
Let's break down your four primary options, with the real pros and cons of each, so you can make a confident decision based on your practice's specific situation.
Option 1: Pay Cash
The most straightforward approach: write a check and own the equipment outright from day one.
Advantages:
Lowest total cost. With no interest, financing fees, or lease charges, cash payment results in the smallest amount leaving your practice over time. If the equipment costs $60,000, you pay exactly $60,000—nothing more.
Maximum negotiating leverage. Vendors and dealers prefer cash transactions because they're simple, fast, and carry no risk of default. This gives you significant pricing power. It's not uncommon to negotiate 10-15% discounts for cash payment, which can save thousands on major purchases.
No ongoing obligations. Once you've paid, there are no monthly payments, no lender covenants to maintain, no lease terms to track. The equipment is yours, free and clear.
Immediate tax benefits. You can take advantage of Section 179 expensing or bonus depreciation immediately, potentially deducting the full purchase price in the year of acquisition (subject to IRS rules and limits—consult your accountant).
Disadvantages:
Significant cash drain. Writing a $60,000 check creates an immediate impact on your operating capital. Money that could have been used for marketing, staff bonuses, debt reduction, or emergency reserves is now tied up in equipment.
Opportunity cost. That $60,000 in cash could potentially earn returns elsewhere—invested in marketing that generates new patients, used to negotiate payables discounts with suppliers, or held as reserves that let you weather unexpected challenges without stress.
Less flexibility. If patient volume doesn't materialize as expected or circumstances change, you can't simply return the equipment or adjust your payment obligations. Your capital is committed.
Best When:
Cash payment makes the most sense when:
You'll still maintain 2-3 months of operating expenses in reserves after the purchase
The equipment's ROI is already proven in your practice (an upgrade rather than new service line)
You can negotiate a substantial cash discount that offsets the opportunity cost
You prefer to avoid any ongoing debt or lease obligations
Quick calculation: If your monthly operating expenses are $40,000, you should maintain at least $80,000-120,000 in reserves. If buying a $60,000 device would leave you with $100,000+ in the bank, cash payment becomes viable.
Option 2: Bank Term Loan
Traditional equipment financing through a bank or credit union, where you borrow the purchase price and repay it over a fixed term (typically 3-7 years).
Advantages:
Lowest interest cost among financing options. Banks typically offer the most competitive interest rates—currently ranging from 6-10% depending on your creditworthiness and relationship. This means lower total cost compared to vendor financing or leases.
You own the asset. From the start, the equipment belongs to your practice (though it serves as collateral for the loan). You can depreciate it, claim Section 179 deductions, and have control over its use and eventual disposition.
Predictable payments. Fixed monthly payments make budgeting straightforward. You know exactly what you'll owe each month for the duration of the loan.
Preserves working capital. Unlike cash payment, you keep most of your reserves intact. With a typical 10-20% down payment, you might put $6,000-12,000 down on a $60,000 purchase, preserving the remaining $48,000-54,000 for operations.
Builds business credit. Successfully managing equipment loans strengthens your practice's credit profile, which can help with future financing needs.
Disadvantages:
Requires down payment. Most equipment loans require 10-20% down, which still represents a significant immediate cash outlay.
Underwriting process. Banks will review your financial statements, credit history, and practice performance. If your practice is young, has inconsistent revenue, or your personal credit is impaired, approval may be difficult or come with higher rates.
Covenants and requirements. Lenders may require you to maintain certain financial ratios, limit additional debt, or provide periodic financial statements. Violating covenants can trigger default provisions.
Collateral considerations. The equipment serves as collateral, and the bank may require additional collateral or a personal guarantee depending on the loan size and your financial position.
Takes time. Bank underwriting typically requires 2-4 weeks (sometimes longer), which can delay your equipment acquisition if you're in a hurry.
Best When:
Bank financing makes sense when:
You want to own the equipment with the lowest financing cost
You have strong financials and credit that will qualify for favorable rates
You expect to use the equipment consistently for its full useful life
You're comfortable with the underwriting process and timeline
You want to preserve working capital but can handle a down payment
Example calculation:
Equipment cost: $60,000
Down payment (15%): $9,000
Loan amount: $51,000
Term: 5 years (60 months)
Interest rate: 8%
Monthly payment: ~$1,033
Total paid: $71,980 (including down payment)
Total interest cost: $11,980
Option 3: Capital Lease (Lease-to-Own)
A financing structure that functions like a loan but is structured as a lease, with ownership transferring to you at the end for a nominal amount (often $1).
Advantages:
Functions like ownership. For most practical purposes, you're buying the equipment. You can often claim depreciation and Section 179 benefits similar to a traditional loan (consult your accountant, as lease accounting can be complex).
Less stringent approval. Capital leases often have easier qualification requirements than bank loans because the lessor retains legal ownership until the buyout. This can help practices with shorter operating histories or less-than-perfect credit.
No down payment in many cases. Unlike bank loans, some capital leases require little or no money down, preserving your cash reserves.
Faster approval. Equipment leasing companies often provide approval and funding more quickly than traditional banks—sometimes within days rather than weeks.
Disadvantages:
Higher effective cost. Interest rates (often called "money factors" or "lease rates") on capital leases typically exceed bank loan rates. You might pay 10-15% effective annual rate instead of 6-10% for a bank loan.
Less flexible. Most capital leases lock you in for the full term with significant early termination penalties. If your circumstances change or better equipment becomes available, you're committed.
More complex accounting. Depending on the lease structure and current accounting standards, you may need to capitalize the lease on your balance sheet, which can affect financial ratios and loan covenants with other lenders.
Potential hidden fees. Some leases include documentation fees, administrative charges, or other costs that inflate the true price. Read the fine print carefully.
Best When:
Capital leases make sense when:
You want ownership but bank underwriting is too restrictive or slow
You need to preserve all available cash (no down payment)
You're certain you'll use the equipment for the full lease term
The convenience and approval speed justify slightly higher costs
Example calculation:
Equipment cost: $60,000
Lease term: 60 months
Money factor: 0.0042 (approximately 10% APR equivalent)
Monthly payment: ~$1,274
Buyout: $1
Total paid: $76,441
Total cost above purchase price: $16,441
Option 4: Operating Lease (True Rental)
A rental agreement where you make monthly payments to use the equipment but never own it. At the end of the term, you return it, renew the lease, or purchase it at fair market value.
Advantages:
Minimal upfront cash. Operating leases typically require little to no down payment—often just the first month's payment. This maximizes cash preservation.
Flexibility to upgrade. When the lease term ends (typically 2-5 years), you can return the equipment and lease newer technology. This is valuable for rapidly evolving equipment like OCT or imaging systems.
Easier approval. Since you're not buying the asset, qualification is generally easier. The lessor knows they'll get the equipment back if you default.
Payments treated as operating expense. Monthly lease payments are fully deductible as rent expense on your P&L, which some practices prefer for financial statement presentation (though this doesn't create more tax benefit than depreciation over time).
Technology risk mitigation. If the equipment becomes obsolete or patient volume doesn't materialize, you can walk away at lease end without owning a depreciating asset.
Disadvantages:
No ownership. You're renting. After 5 years of payments, you have nothing—the lessor keeps the equipment or sells it to you at fair market value (which could be significant for equipment that retains value).
Highest total cost. Over time, operating leases cost substantially more than any other option. You're paying for the lessor's depreciation, their profit margin, and the flexibility the lease provides.
End-of-lease complications. Many operating leases have return requirements, wear-and-tear fees, or fair-market-value purchase prices that create surprises at lease end. Read these terms carefully upfront.
No tax advantages of ownership. You can't depreciate or take Section 179 deductions because you don't own the asset. Your only deduction is the monthly lease payment.
Best When:
Operating leases make sense when:
Technology is changing rapidly and you expect to want newer equipment in 3-5 years
Your patient volume for this service is uncertain and you want to test the market
You have very limited cash reserves and can't commit to ownership
You value maximum flexibility over minimizing total cost
You're in a temporary location or growth phase where long-term commitments don't fit your strategy
Example calculation:
Equipment value: $60,000
Operating lease term: 60 months
Monthly payment: ~$1,400-1,600 (varies widely by lessor and equipment)
Total paid over 60 months: $84,000-96,000
End result: Return equipment or purchase at fair market value (perhaps $15,000-25,000 depending on condition and market)
Total cost: $84,000-120,000+ (highest of all options)
The Break-Even Analysis That Matters
Regardless of which financing method you choose, you need to know one critical number: How many procedures do you need to perform monthly to cover the payment?
Here's the formula:
Monthly payment ÷ Net profit per procedure = Break-even procedure volume
Let's work through a real example:
Equipment: $60,000 OCT Financing choice: 5-year bank loan at 8% Monthly payment: $1,216 OCT screening reimbursement: $100 per procedure Costs per procedure: $10 (staff time) + $5 (supplies) + $35 (overhead allocation) = $50 Net profit per procedure: $50
Break-even calculation: $1,216 ÷ $50 = 24.3 procedures per month
This means you need to perform approximately 24 OCT screenings per month just to cover the equipment payment. Any procedures beyond 24 represent actual profit contribution.
Now apply the safety margin: Can you realistically perform 30-36 procedures per month (25-50% cushion)? If yes, the investment makes financial sense. If you'd struggle to hit 24 consistently, reconsider.
Making Your Decision: A Framework
Here's how to choose among your options based on your practice's situation:
Choose CASH if:
You have 3+ months operating expenses remaining after purchase
You can negotiate a 10%+ cash discount
The equipment is proven in your practice (upgrade/replacement)
You strongly prefer no ongoing obligations
Choose BANK LOAN if:
You want ownership with the lowest financing cost
You have solid financials and credit
You'll use equipment consistently for 5+ years
You can manage a 10-20% down payment
Choose CAPITAL LEASE if:
Bank underwriting is too slow or restrictive
You want ownership without a down payment
Slightly higher cost is acceptable for convenience
You're certain about full-term utilization
Choose OPERATING LEASE if:
Technology changes rapidly in this equipment category
Your volume is uncertain (testing a new service)
Cash reserves are very limited
Flexibility outweighs total cost concerns
You're in a transitional phase (temporary location, pending sale, etc.)
Red Flags to Avoid
Regardless of which financing path you choose, watch out for these warning signs:
Payments that require more than 50% of realistic procedure volume to break even. This leaves no safety margin for slower months or unexpected challenges.
Operating leases with aggressive end-of-term buyout requirements or wear-and-tear fees. These can trap you into paying far more than expected.
Any financing that would drop your practice reserves below 1 month of operating expenses. This creates dangerous financial fragility.
Vendor financing with minimums, clawbacks, or evergreen renewals (see our previous post on vendor financing red flags). These terms can transform a reasonable investment into a financial trap.
Deals that "require a decision today" or create artificial urgency. Legitimate financing will still be available after you've done your due diligence.
Taking Action
Before you commit to any equipment financing:
Calculate your break-even procedure volume with a realistic safety margin. Be honest about your expected utilization.
Model the total cost of each option for your specific situation. Don't just compare monthly payments—look at total dollars over the full term.
Check your reserves. Make sure you'll maintain adequate operating capital regardless of which path you choose.
Read every word of the agreement. Whether it's a loan document or lease contract, understand the terms, requirements, and penalties.
Get competitive quotes. Don't accept the first offer. Banks, credit unions, and leasing companies all compete on terms and rates.
Consult your accountant about tax implications. Section 179, bonus depreciation, and lease treatment can significantly impact your after-tax cost.
Equipment acquisition is one of the most significant financial decisions you'll make in your practice. The difference between smart financing and poor financing can mean tens of thousands of dollars over the life of the equipment—and the difference between manageable cash flow and constant financial stress.
Choose the structure that fits your cash position, risk tolerance, and confidence in utilization. If you can comfortably clear the payment with a 25-50% cushion, you're in the safe zone.
