Medical equipment loans can be an ideal way for several medical organizations to continue to build their inventory without adding additional costs or stress to their cash flow. Many clinics and other healthcare professionals do not take financing into their business practices, but will look to use credit cards occasionally when they have an urgent need for funding. It is essential that medical organizations understand the differences between the two forms of financing to make the best decision for their organization.
Medical Equipment Loans vs. Credit Cards: Key Factors to Consider
While both financing options provide an opportunity for medical providers to purchase the equipment they need, the differences between the two are significant in relation to the pricing of the option, the structure for repayment, and the financial effect over time.
1. Interest Rates and Total Cost
Among the many variables that affect each financing option, the interest rate is probably the most critical. With credit card companies offering many different annual percentage rates (APRs), a card may charge significantly higher amounts if the cardholder does not quickly pay off any balances. Medical equipment loans generally provide lower interest rates because they were designed specifically for a business-related purchase. Therefore, loans may be the best choice for purchasing large amounts of equipment over time due to lower debt service costs.
2. Credit Limits and Purchasing Capacity
Small items can be purchased with credit cards. However, the available credit limit can lower the consumer’s purchasing power. If the consumer uses up a large part of their credit limit, it could also affect their credit utilization ratio negatively. Medical equipment loans are typically based on the value of the medical equipment being purchased, which allows healthcare providers to finance more expensive assets than would typically qualify for a credit card.
3. Repayment Flexibility
With a credit card, borrowers have the ability to dictate how they want to repay their debt every month. So long as a minimum payment is made, the debt can continue to be carried. Unfortunately, only paying the minimum can severely prolong the payback period and result in unnecessary interest costs. There is no such flexibility with medical equipment loans, but the payback period is fixed, allowing clinics to plan their budgets more effectively.
4. Impact on Cash Flow
Managing cash flow is vital for the success of any business, especially for a healthcare business. Credit cards can create an almost immediate ability to purchase, but if a high-interest balance is carried, cash reserves can be depleted. For larger purchases, healthcare equipment financing is designed to be flexible with cash flow by aligning the payback period with the expected revenue.
5. Financial Risks and Long-Term Considerations
Credit cards can create a burden on cash flow if financed for long periods. Variable interest rates can further increase financing costs. Hospital equipment financing or other healthcare financing options require a thorough assessment of the long-term ability to service the debt. The financing should enable practice growth and should not be an impediment. Projected revenue, future costs, and debt of the practice should be carefully evaluated before incurring any additional debt.
When are Medical Equipment Loans the Better Choice?
Credit cards may be helpful with minor purchases or immediate cash flow needs. However, there are circumstances where acquiring a medical device financing option could provide a much more advantageous form of financing. Medical equipment loans are created solely to provide financing for the purchase of medical equipment and will typically include benefits that credit cards cannot provide.
For instance, healthcare providers acquiring expensive high-value equipment typically accrue longer repayment periods and lower interest rates when financing their high-value purchases. A consistent monthly payment schedule also makes it easier for them to manage their finances while reducing uncertainty in budgeting. Furthermore, finance amounts typically depend on the price of the equipment purchased versus the limit of the credit card used for the purchase. All of these factors can help make it easier for growing companies to acquire equipment.
Common situations where medical equipment loans may be preferred include:
- To acquire an expensive diagnostic or imaging machine, such as a CT Scanner, MRI, or PET scanner.
- To grow their practice and need several pieces of equipment upgraded.
- To conserve cash flow for day-to-day operations.
- To find lower financing costs and structure their repayment to be predictable over time.
- To finance equipment with a useful life of several years beyond the term of a loan.
Final Thoughts
When deciding on a credit card vs. a medical equipment loan, costs, flexibility in repayment, and financial risk must be analyzed in detail. The use of a credit card may be an option for small purchases or short-term financing needs when the balance will be paid off quickly. The benefits of using medical equipment loans are that the interest rate is lower than a credit card, and the potential for a greater amount of money to purchase equipment is available, thus allowing the provider to achieve long-term financial stability.