Keeping up with lab technology and the latest in analytical and clinical instrumentation can make managing equipment financially challenging for research labs. In the face of shrinking budgets and stiffening global competition, leasing can offer advantages that owning cannot.
The Fair Market Value (FMV) Lease
Among leasing options for life sciences equipment, the Fair Market Value (FMV) lease is one of the most popular because of its flexibility. It allows the leasing of equipment for a fixed period with several end-of-term options. If the borrower opts to purchase the equipment at the end of the lease, the price will factor in depreciation – how much the equipment has lost in value during the term of the lease, and how much the borrower paid over that period. During the initial lease period you have the option to pre-pay, make monthly, quarterly, or annual payments, typically at a lower cost than if the equipment were purchased. That’s because the equipment has a residual value at the end of the lease which the financing company can recover through the equipment’s sale or re-lease.
FMV leases assume a high likelihood that the equipment being used is going to be returned or upgraded at lease end. However, if circumstances change during this period, the option exists to continue to use the equipment, you may have the option to buy the equipment at a negotiated fair market rate or continue you lease, usually at a reduced rental, depending on the lease terms.
In order to set up this type of leasing arrangement, it is important to work with a company who has expertise in asset management to effectively forecast the useful life of the instrument you are acquiring. FMV leases can result in low monthly payments for you and may even be tax deductible, although it’s important to consult an accountant for any tax advantages.
Fixed Renewal and Purchase Option
With a Fixed Renewal and Purchase Option Lease, at the end of the lease term the borrower has the option of returning the instrumentation, negotiating a new lease, or purchasing the equipment often for pre-defined fixed amounts. Fixed renewals avoid the frustration, delays and additional costs of setting up a new lease.
Put and Call
Much like stocks, ‘Put and Call’ are associated with sell and buy options in some contracts, and provide for the right, but not the obligation to either sell or purchase leased equipment. This type of lease is often used when either the future need or residual value is unknown to the parties. It is a great way to gain the immediate benefits of an FMV lease but sharing in the responsibility and risk of an uncertain asset. This is a very sophisticated contract, so be sure to work with a company who can set it up properly to be certain everyone understands the possible outcomes and how they impact your business goals.
For credit qualified customers, the advantage of a balloon loan is that it generally comes with lower initial cost of use, and smaller monthly payments, leaving a larger outstanding balance (that’s why its called a ‘balloon payment’) at lease end. Customers who select this type of lease are often doing project cost assignment during the lease and recognize a need for the asset post project.
The sale leaseback option is an ideal method for changing course after the purchase of assets. if you recognize a present need to create more asset flexibility as described in some of our lease products, a sale/leaseback may be just the right solution. Companies can generate immediate cash, lower overall cost of use, continue to use the purchased equipment, and generate flexible lease end options.
A step-lease is a contract that establishes future price increases/decreases for your lease at set times throughout the life of the lease. If qualified, it presents an opportunity for you to negotiate up front in situations that involve long term planning. For example, you may anticipate that the new equipment you plan to lease will boost your revenues over time, stepping up future payments may be helpful. Step Up/Down Payments are designed to provide you the flexibility to match your lease payments with your expected cash flows or other anticipated needs.
Back-end Residual Sharing
The residual value is the estimated value of a fixed asset at the end of its lease. The leasing company uses residual value as one of its primary methods for determining how much you will pay in lease payments. In back-end residual sharing, the residual value of the leased equipment is shared between the leasing company and the lessee when that equipment is sold. For example, if you lease equipment and then decide to purchase it or return it for sale, this type of agreement enables you to recover some costs – depending on the contract you negotiated with the leasing company.
Leasing Line of Credit
This is a line of credit, offered as a commitment, to allow customers to plan future asset acquisitions with the comfort of knowing that the capital is set aside to execute the leases. When seeking a lease, you typically have a vendor to quote on the equipment and then bring that quote to the bank or leasing organization to finance the lease. This process is repeated for each additional instrument. However, with a leasing line of credit, rather than financing a specific piece of equipment, the lender will grant you a line of credit for a limited period of time, typically a year, enabling you to initiate leases with different vendors, for different types of equipment, up to your credit limit.
The Last Word
There are plenty of options to choose from when it comes to high end laboratory instrument leasing. Make sure to weigh all your choices carefully before making the final decision and consider getting expert advice. Consider partnering with an organization like McKinley Scientific who can help match your financing needs to your business goals and the application of the instrument. To get started….(insert call to action).
Paul Corcoran is President & CEO of McKinley Scientific. Contact us today for a no-obligation conversation about leasing options for lab instruments.