Financing the Future

As the economy continues its long recovery, radiology departments still need capital to operate.

It’s been 3 long years since the 2008 financial meltdown. And while the economy has yet to completely turn the corner, radiology departments still have to carry on the business of imaging, including purchasing or leasing new equipment. Axis Imaging News recently spoke to Martin E. Zimmerman, president and CEO of LFC Capital Inc, which specializes in financing diagnostic imaging equipment, IT systems, software, and other medical equipment, and Frederick S. Summers, chairman and CEO of VFG Healthcare Finance, which helps health care enterprises finance and acquire capital equipment, about the realities of doing business in today’s market, the financial pitfalls to avoid, and what the future holds.

IE: Are hospitals and imaging centers still purchasing new equipment, even in the down economy? How has it changed since 2008, and do you see the market rebounding any time soon?

Zimmerman: To the best of my knowledge, they are being more selective and cautious. There’s no doubt that their revenues are down. But, instead of the economy “rebounding,” I think that “recovering” is a better term. It’s a slow recovery with fits and starts with some loosening from the lenders. The stock market is relatively healthy and that’s been helping. And the one thing you have in health care that you don’t have in other industries is a lot of brand-new legislation, and the long-term result of that will undoubtedly be an emphasis on cost cutting and saving money by health care providers who will have to be more efficient long into the future.

Summers: Yes, hospitals and imaging centers are still purchasing new equipment. However, the buying-decision process is much more methodical and deliberate as compared to how buying decisions were made prior to the recession. As 2011 progresses, we are seeing hospitals and imaging centers move forward with new imaging equipment acquisitions as long as there is a justified business case, including quality of care justifications, for the purchase. In other words, if the equipment is revenue producing, more facilities are finding ways for purchases to be made. If the equipment is non-revenue generating, new equipment is not being purchased unless it is truly at the end of its useful life and the hospital has no other option.

IE: How should an imaging facility or hospital go about choosing a financial partner?

Zimmerman: There are various types of financial partners and each have their advantages. There are institutional ones, such as banks, and there are businesses, such as independent leasing companies. The latter can be as competitive as a bank. They almost always can be more flexible with payment schedules, for instance, that can maximize cash flow. In larger banking institutions, they’re always looking to build earnings up, and there’s pressure to increase margins. Independent companies have the same underlying goal—profit—but they make it by providing services above and beyond a traditional banking institution. But I think it really helps health care enterprises to have both types of financing. Each has unique advantages, and most independent leasing companies will tell you that you should have a bank in the picture.

Summers: The first thing to do is to realize that most equipment leasing and financing companies are nonbank entities. This means that many financiers that hospitals and imaging facilities will deal with aren’t regulated and typically don’t have to follow certain “truth-in-lending” rules and regulations that banks must follow. The second thing to realize is that when dealing with an unregulated financing company things like reputation, integrity, and time in business are paramount. Is the company you are dealing with financially solvent? Have they been in business as the same legal entity for a respectable amount of time? Pricing is important, but it is not the only consideration the buyer should have. Ask for references. Ask for professional association affiliation and certification credentials. Make certain that you thoroughly understand the ramifications of the agreement.

IE: When looking to purchase new equipment, what are some of the common pitfalls that health care providers encounter or mistakes they make? How can they avoid these pitfalls?

Summers: One of the most common pitfalls is simply being apathetic toward the purchasing process by not doing enough homework and assuming that the “rules of the game” have stayed the same. Do you truly understand what you are buying? Don’t be afraid to ask tough and direct questions. It’s important to understand exactly what you get, exactly what you don’t get, and the costs of buying or not buying. Take, for example, an optional extended warranty or service package on a new piece of equipment. If you are financing an equipment purchase along with an extended service plan, you should bear in mind that service plans are typically funded on an annual basis. It’s important to know and understand the timing of the required cash flows to a particular deal as there are often opportunities to structure transactions in ways that might be more optimal to an organization’s balance sheet.

Zimmerman: It’s certainly helpful to understand the process from beginning to end. For instance, what happens when you decide to end a lease early? Some clients pay the contract off, but there are other options that are much more graceful, and that’s where independent leasing companies can help. It’s important to have a good sense of what the alternatives are, and to have a clear idea, hopefully in writing, how you will unwind the partnership. It’s helpful to have those discussions. Often it’s better to know what to expect up front. One thing to remember about leasing is that it’s simply a loan with special characteristics.

IE: Financing equipment isn’t a one-size-fits-all solution. What are some of the various financing options that your organization offers to health care clients?

Zimmerman: We offer all sorts of financing options. Health care is a complicated, tough business today, and we try to handle financing with imagination. We’re willing to take a risk because it’s our job to make our clients’ lives easier. We want to make sure that they have adequate cash and profit and understand the need to cut costs. One option we can offer, as an example, is, instead of monthly payments, quarterly payments starting 90 days after the equipment is delivered. This allows the organization to build cash flow. The bottom line is that we try to optimize the needs of the clients. We understand that we don’t have all of the answers for every situation, but we have fresh ideas that can help our clients meet their needs and build around whatever their pivot point is.

Summers: Flexibility is the key. Our objective is to provide funding options that fit the cash flow, tax, and financial needs of the clients. We offer all types of leases to include capital leases, finance leases, off-balance-sheet leases, and operating leases. When it comes to the larger imaging equipment deals, some of the funding requirements can involve facility build-outs and progress payments.

IE: Is a regular/traditional bank loan ever appropriate? What’s the upside versus downside?

Summers: The main upside of taking a loan out with a bank is that most of the time, but not always, the customer won’t be penalized for paying off the loan early. The downside of bank borrowing comes from the fact that banks don’t really want to lend any money—at least not in a way that puts them at risk—and that typically the cost of the loan is much greater than the borrower realizes. Banks, for the most part, do not want to take risks in this economy. The reasons are simple: the investment community and regulators are closely watching banks, and most banks have proven that they are not very good at calculating risk. When thinking about taking out a bank loan, it is important to understand what that loan is really costing you. Even with the depository relationship, most banks won’t provide more than 80% loan-to-value (LTV) financing. We believe that bank term financing should be utilized only as a last resort. Bank financing typically equates with giving up control.

IE: Can you speak about any interesting customer challenges in obtaining financing and how your organization helped find a solution?

Summers: If an imaging center or hospital is credit worthy, we usually find a way to get the customer funding. If they are not credit worthy, we try to figure out how we can help them become credit worthy. We are certainly not afraid of transactions that require structure, thought, and a lot of attention to detail. We recently helped put together a $700,000 transaction that included refurbished medical imaging equipment, new equipment, engineering, and construction costs. There were five unique vendors that each had their own payment terms. We managed the funding process from inception to completion—a process that took close to a year and included multiple payments of varying amounts.

Zimmerman: We occasionally help people with pending financial problems. We advise in a quiet way in terms of some practice—such as catching overpayments—with minimum fuss and mess. If there’s a systemic problem, we meet with the CEO and CFO, and point out any red flags we might see in the financial reports, such as missing information that could be misunderstood. We will use the footnotes in the report to help get clarity, and it’s got to be clear. I feel that it is our responsibility to point out these problems, and there is a lot of interest usually from these CEOs and CFOs when we point them out. Sometimes this can be a real help.

IE: What are some of the unique challenges in obtaining financing for equipment in this difficult economy?

Zimmerman: A lot of lenders have their preferences in terms of manufacturers and can be leery about new companies and equipment. My point of view is that you take the risk. This is where a small organization, like ours, has an advantage over the larger financial institutions. We have guidelines; they have boxes. I still think we need the banks, but we keep banks honest and the bids are low enough to be affordable.

IE: What does the future look like for the financing of imaging equipment and what does it mean for patient access?

Summers: The landscape has certainly changed. We are starting to see more major hospitals invest in used and refurbished medical imaging equipment. We anticipate that this trend will continue for the foreseeable future. Regardless of whether America ever adopts a “pure” public health system, there are and there will continue to be a significant amount of government subsidies working on the public’s behalf. Therefore, patient access will only increase as time moves on.

Zimmerman: I think independent leasing companies will be around a very long time, because we offer a lot of flexibility. I think the health care markets will be more efficient, but I think that it will be more complicated to get in and the margins will be tighter. And I think that those companies that may be experiencing financial problems will find their special situations will cause their financing to be more expensive, at least in the short term.

---

C.A. Wolski is a contributing writer for Axis Imaging News.