Avoid these 4 Mistakes When Financing Medical Equipment

Medical equipment represents one of the largest capital outlays for any practice, yet many practitioners accept the first offer from a supplier or structure the loan in a way that drains cashflow unnecessarily.

Whether you're purchasing diagnostic imaging equipment, surgical instruments, dental chairs, or practice management systems, the way you fund that purchase affects your tax position, working capital, and ability to upgrade when technology moves forward. The four mistakes outlined below appear consistently across general practice clinics, specialist suites, dental surgeries, and allied health facilities, and each one can be avoided with the right structure from the outset.

Accepting Vendor Finance Without Comparing External Lenders

Vendor finance is arranged through the equipment supplier and often presented as the most convenient option at the point of sale. It may be convenient, but it is rarely the most cost-effective.

In our experience, vendor rates are typically higher than those available through a commercial lender or broker who can access multiple funding sources. The supplier earns a margin on the finance arrangement, and that margin is built into the rate you pay. When you compare rates independently, you're not limited to one lender's appetite or pricing. A broker working across banks and specialist asset lenders can present options with lower rates, more flexible terms, and structures better suited to your tax position. Consider a dental practice purchasing a CBCT scanner worth $120,000. The supplier offers vendor finance at a fixed rate with set monthly repayments over five years. An external lender, accessed through a broker, may offer the same term at a lower rate and allow you to structure the loan as a chattel mortgage rather than a standard commercial loan, which changes the tax treatment entirely. That difference can amount to several thousand dollars over the loan term, and it preserves the option to claim GST input credits and depreciation more strategically.

Before signing any paperwork at the point of sale, ask the supplier to provide the finance terms in writing and give yourself time to compare. You are not obligated to accept the first offer, and most suppliers will hold pricing for a reasonable period while you arrange alternative funding. If you're exploring broader asset finance options, the same principle applies: compare before committing.

Choosing the Wrong Structure for Your Tax Position

The structure you select determines how GST is treated, when you can claim depreciation, and whether the repayments show as an operating expense or a balance sheet liability. A chattel mortgage allows you to claim the GST input credit upfront and own the equipment from day one, while a finance lease spreads the GST across each payment and the equipment remains off your balance sheet until the lease concludes.

If your practice is registered for GST and has strong cashflow in the first quarter, a chattel mortgage often makes sense because you claim the GST refund immediately, reducing the net outlay. If cashflow is tighter or you prefer to smooth the expense over time, a finance lease may be more appropriate. The tax benefit of depreciation also depends on your structure. With a chattel mortgage, you own the asset and claim depreciation annually. With a finance lease, the lease payments themselves are often fully deductible as an operating expense, but you do not own the asset during the lease term, so depreciation is not relevant until you finalise the lease and take ownership. Many practitioners assume all equipment finance works the same way, but the structure you choose has a direct impact on your tax outcome each year.

Speak to your accountant before you sign. The structure should match your cashflow pattern, your tax position for the current financial year, and your intention to keep or upgrade the equipment at the end of the term.

Overlooking the Residual Value and How It Affects Cashflow

A balloon payment, also called a residual value, is a lump sum due at the end of the loan term. It reduces the monthly repayment amount but defers a portion of the loan until the final payment. This structure can make the repayments more manageable in the short term, but it also means you need to plan for that final lump sum or refinance the residual when the term ends.

Residual values are common in car loans and commercial vehicle funding, but they also appear in medical equipment structures, particularly for high-value items like MRI machines, ultrasound systems, or surgical lasers. The residual is typically set as a percentage of the original loan amount, and the percentage depends on the term length and the lender's assessment of the equipment's depreciation curve. A longer term with a higher residual means lower monthly repayments but a larger final payment. A shorter term with a lower residual increases the monthly cost but reduces the amount due at the end. Consider a physiotherapy clinic financing $80,000 worth of rehabilitation equipment over four years with a 30% residual. The monthly repayment is lower than it would be with no residual, but at the end of year four, the clinic owes $24,000. If that amount is not planned for, the clinic either refinances the residual, sells the equipment to cover the balance, or faces a cashflow shortfall. The residual structure works well when the equipment has strong resale value or when the practice plans to upgrade and trade in the equipment at the end of the term. It works poorly when the equipment depreciates faster than expected or when the residual was set too high relative to the actual market value.

Before agreeing to a residual, ask the lender or broker to model the repayment with and without the balloon payment. Compare the total interest cost, the monthly cashflow impact, and the final payment. Make sure the residual aligns with your upgrade cycle and your ability to cover or refinance that amount when it falls due.

Funding Office Fit-Out and Equipment on the Same Loan Without Separating Asset Classes

When setting up or refitting a medical practice, it's common to fund everything in one transaction: the fit-out, the furniture, the IT systems, and the clinical equipment. Combining these into a single loan simplifies the paperwork, but it also means you're paying interest on short-lived assets at the same rate and term as long-lived equipment, and you lose the ability to structure each asset class according to its useful life and tax treatment.

Office furniture and fit-out typically depreciate faster than clinical equipment. A desk or a reception counter may have a useful life of five to seven years, while a pathology analyser or a dental X-ray system may remain in service for ten years or more. Funding both on a seven-year term means you're still paying off the furniture long after it's been replaced, and you're potentially missing out on tax deductions that could be claimed sooner if the fit-out was separated and depreciated more aggressively. A GP clinic purchasing $200,000 in equipment and fit-out might split the funding into two facilities: a chattel mortgage for the clinical equipment and a commercial loan or separate asset loan for the fit-out. The clinical equipment is structured over five years with full depreciation claimed annually, and the fit-out is structured over three years to align with the expected replacement cycle. This approach allows the practice to claim deductions sooner, manage repayments according to each asset's lifespan, and avoid paying interest on items that no longer hold value.

If you're setting up or expanding, work with your broker to separate asset classes before the loan is drawn down. Once the loan is in place, it's difficult to restructure without refinancing entirely, and that introduces additional costs. Structuring correctly from the start preserves flexibility and ensures each dollar of interest paid aligns with the useful life of the asset being funded.

Medical equipment funding is not a one-size-fits-all process, and the mistakes outlined above are entirely avoidable when you take the time to compare offers, match the structure to your tax position, plan for residual payments, and separate asset classes according to their lifespan. Call one of our team or book an appointment at a time that works for you.

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