Should a medical practice go in debt or pay outright?

March 15, 2019

Acquiring debt is not necessarily a bad thing – it depends on the reasons for doing so.  Certainly borrowing to meet current expenses is not usually a good idea unless there’s some short-term, predictable reason for it.  For asset purchases, there are several factors to consider in determining whether to pay for equipment out of current funds or to defer payment through the use of some financing mechanism (such as leasing, bank loan, physician loan, etc.).

In general, I’ve been in favor of financing equipment over the period it benefits the practice, especially if it’s revenue-generating like diagnostic imaging or lab equipment.  As the new revenue comes in, you use part of it to pay for the cost of the equipment.  This also has he advantage of matching your tax deductions through depreciation against the revenue stream.  However, in these days of large up-front depreciation allowances you might create a roller-coaster effect on taxable income if you deduct the full purchase price of the equipment in the year you finance it, and then experience ‘phantom income’ in those years when you have to repay the loan.

Another consideration is the value of the practice for new partners or retiring partners.  Brand new, fully paid-for equipment will increase the net book value of the practice (a common starting point for buy-in/out valuations) whereas the value of equipment that is offset by a corresponding liability keeps the net book value of the practice lower.

There’s no right or wrong answer to the amount of debt your practice should have, it all depends on your circumstances.

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