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Lease Finance Agreements
In regard to risk and return, there are advantages and disadvantages for organizations when entering into a leasing agreement to meet capital needs. The healthcare institution’s facilities planning group often deploys a strategy that falls on a continuum that is not too aggressive but is not overly conservative either (Zelman, McCue, Millikan, & Glick, 2003). Healthcare organizations are faced with decisions on its working capital needs and how to appropriately finance those needs as they become evident by fluctuation and increased patient volume (e.g., whether to enter into a leasing agreement to meet those needs and demands). Healthcare facilities are finding it increasingly difficult to acquire capital for everyday needs such as equipment. Entering into a leasing agreement is sometimes the only viable option. Healthcare facilities may also choose to enter into a leasing agreement to avoid the delays of submitting a capital budget request as it would be cheaper to lease a piece of equipment rather than buying outright. By leasing a piece of equipment, the organization is able to upgrade equipment as needed and avoid technological obsolescence. Furthermore, when an organization leases, maintenance for the equipment is usually included and is thus more convenient—both in maintenance terms and financially. When entering into a leasing agreement, a healthcare organization has two options: an operating lease or capital lease. If the organization is looking to lease equipment for a shorter period than the equipment’s economic life (a year or less in time), then an operating lease would be more beneficial. Operating leases are optimal for instances in which the lessor incurs ownership of the equipment but also is responsible for maintenance and any problems that might occur during the lease. The capital lease, however, is for periods lasting more than one year—virtually all of its economic life. The downside of the capital lease, compared to the operating lease, is that the lessee cannot cancel the lease without fear of penalty (Eisfeldt & Rampini, 2009). Strategic decisions are often made by comparing the present value cost of a purchase decision with the present value cost of a lease decision during a time period. Much like a return on analysis (ROI) comparison, the option that best fits the financial goals and constraints of the institution is approved. From a financial management perspective, a capital lease or operating lease would be more beneficial, mainly because the lessor is responsible for the care and maintenance of the machine.
Baker, J. J., Baker, R. W., & Dworkin, N. R. (2018). Health care finance: Basic tools for nonfinancial managers (5th ed.). Burlington, MA: Jones & Bartlett Learning
Eisfeldt, A. L., & Rampini, A. A. (2009). Leasing, ability to repossess, and debt capacity. The Review of Financial Studies, 22(4), 1621-1657.