Drowning in Equipment Loans? 3 Steps to Decide if Consolidation is Right for You

Upgraded your EHR? Completed the transition to ICD-10? Revenue cycle running smoothly? If so, you’re ahead of many practices by leaps and bounds. But just because you’ve achieved your systems goals doesn’t mean it’s time put your practice on autopilot.

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ECPs continue to face financial pressures—eight glaucoma and retina procedures suffered double-digit percentage Medicare payment cuts in 2016.To stay competitive and grow, physician owners must continually look for smart ways to lower the cost of being profitable. Managing multiple equipment leases or loans is an often overlooked cause of lost time and money—could consolidation be the answer?

Often, the practices struggling to keep up with multiple payments are those that that can least afford to do so. “Decisions between leasing and buying often come down to cash flow, with higher-profit practices typically buying equipment and lower-profit ones financing or leasing,” practice management expert John Pinto noted in the July issue of Ophthalmology Management.

It’s not uncommon to find practices shuffling 7-10 or more equipment leases. By consolidating, you can replace multiple payments with one monthly payment. This means saving on interest, administrative time, and even eliminating late fees for payments that get lost in the monthly shuffle. Additionally, you may be able to change the timeline for paying off the loans, thereby improving cash flow.

Consolidation vs. Refinancing

Lenders often use these terms interchangeably, but refinancing and consolidation aren’t the same thing. When refinancing, a borrower pays off an existing, higher interest rate loan with a new, lower interest rate loan. Consolidation refers specifically to the process of refinancing multiple loans into one new loan. You may not always get a better interest rate by consolidating, but the interest rate isn’t the only thing that matters—you may be able to save in other ways.

Is Consolidation is Right for You? 3 Steps to Find Out

Just because you can qualify for debt consolidation doesn’t mean it’s the best option for your practice. Run the numbers first to make sure your new loan arrangement will actually benefit you.

Step 1: Calculate the total amount you’ll be consolidating. Determine the payoff amount for each currently outstanding equipment loan. You can get this information from your lender or the loan amortization schedule, if you have it. The total equals the size of the new loan you’ll need.

Tip: Some loan agreements include a prepayment penalty—they’re meant to protect the lender against the interest lost when a borrower pays off a loan early. These penalties can be significant and could make debt consolidation less attractive, so don’t forget to include prepays as you calculate your payoff amounts.

Step 2: Calculate the effective interest rate. Knowing this number will give you a clearer picture of any financial product’s true cost, and could prevent you from making a potentially expensive mistake. Stated interest rates that look equal on paper (called nominal interest rates) can actually be quite different due to varying loan terms, amortization schedules, compounding interest, and other factors. This calculation can be complicated, so consider using a reputable online calculator.

Step 3: Compare apples to apples. Compare the combined total cost of your existing loans to that of any potential new loan. Add up the total amount you’ll pay in interest over the life of each of your current loans, according to the original payment schedules. Remember, differences in your loan terms can significantly impact the total cost of your loan. Do you have an operating lease where you’ll have to pay fair market value for the equipment at the end of the lease term? Or will you have to pay thousands of dollars in shipping costs to return it to the vendor?

Eyes Open: There may be situations where your total cost of borrowing through consolidation is actually higher, but it’s still the right decision to move your practice forward. If you are struggling financially, consolidating could help you attain more manageable payments and improve your immediate cash flow—that may be worth the extra cost.

By Al Regdos, Alpine Capital