In the fast-paced world of scientific research, having access to cutting-edge laboratory equipment is not just a luxury—it’s a necessity. For founders, scientists, and lab managers, the question of acquiring and maintaining state-of-the-art instrumentation can be a critical one, and the high costs of procuring and maintaining specialized lab equipment can significantly hinder progress.
Equipment leasing presents itself as a strategic solution, offering a flexible pathway to obtaining the tools needed to drive breakthrough discoveries. It also provides many benefits, including cost-effectiveness, flexibility, and access to state-of-the-art technology without the hefty upfront investment.
In this comprehensive guide, we’ll cover the ins and outs of equipment leasing, tailored specifically for the dynamic landscape of R&D in the life sciences sector. Whether spearheading a startup or managing an established lab, this resource is designed to help you identify and explore a procurement method besides buying.
Why Equipment Leasing Matters for Laboratories & Biotech Startups
Acquiring laboratory equipment usually involves substantial upfront expenses. The capital outlay required to buy an instrument or system outright can strain budgets, whether the equipment includes advanced microscopes, high-performance liquid chromatography systems, or precision spectrophotometers. Instruments like these are crucial to the success of any laboratory, forming the backbone for experiments, data collection, and analysis.
However, making significant financial commitments for equipment can be daunting for many labs, especially for startups and smaller research initiatives where funding is limited—equipment leasing steps in as a strategic financial solution.
By opting for a lease arrangement, labs can circumvent the need for a hefty upfront investment, allowing them to allocate resources towards other critical operational requirements such as hiring skilled personnel, purchasing consumables, or investing in supplementary research projects.
The Benefits of Equipment Leasing
There are a number of benefits equipment leasing offers, including cost-effectiveness, flexibility, and more. We cover some of those here, but you can read our article, The Benefits of Equipment Leasing for Biotechs, to dive deeper into the subject.
Leasing spreads the cost of equipment over its useful life, reducing the initial financial impact. Moreover, it eliminates the additional financial burden of maintenance and repair costs, which can be significant over the lifespan of sophisticated laboratory equipment. This financial relief can allow labs to allocate resources more efficiently, promoting long-term sustainability and growth, unlike the outright purchase of instrumentation, which ties up large amounts of money in fixed assets.
Flexibility in Equipment Selection
Scientific research is a dynamic endeavor, often requiring adaptation to changing research objectives and methodologies. Leasing allows labs to choose and utilize equipment that aligns with their current research needs. At the end of the lease term, labs have the option to upgrade to newer models or even switch to different types of equipment, ensuring they always have access to the latest and most relevant technology.
Access to State-of-the-Art Technology
Leasing companies like Excedr are committed to providing labs with the most advanced and cutting-edge equipment available. Working with a trustworthy lessor can ensure that your laboratory has the equipment to carry out experiments and analyses with the highest precision and efficiency, ultimately enhancing the quality and impact of their research endeavors. By leasing, labs can leverage top-of-the-line instruments without the substantial capital investment required for outright purchase.
Avoidance of Technological Obsolescence
Equipment can quickly become outdated in scientific fields characterized by rapid technological advancements. This poses a significant challenge for labs aiming to remain at the forefront of their respective fields. Equipment leasing effectively mitigates this risk. Labs can upgrade to newer models or technologies after the lease term, ensuring they stay in lockstep with the latest advancements without being tied down by obsolete equipment.
By embracing equipment leasing, laboratories can balance scientific innovation and fiscal responsibility, ensuring they are poised for success in an ever-evolving research landscape. This strategic approach empowers labs of all sizes and stages to unlock their full potential and drive groundbreaking discoveries.
Understanding Equipment Leasing Basics
Definition of Equipment Leasing
Equipment leasing is a financial arrangement wherein a business obtains the right to use specific equipment for a predetermined period, typically in exchange for regular payments. Unlike traditional equipment purchases, leasing allows labs to use the equipment without taking on full ownership responsibilities, providing flexibility and cost-effective access to necessary instruments.
Types of Leases
There are two primary types of equipment leases, each with its unique features and benefits:
- Operating leases: Operating leases are akin to a rental agreement. Labs can use the equipment for a defined period, usually covering the equipment's useful life, but they do not take on ownership responsibilities. At the end of the lease term, labs can return the equipment, extend the lease, or purchase the equipment at its fair market value. Operating leases are ideal for labs that require equipment for specific projects or have rapidly evolving research needs. They provide flexibility and reduce the risk associated with technological obsolescence.
- Capital leases: Capital leases, also known as finance leases, offer labs a pathway to eventual ownership of the equipment. These leases typically span a significant portion of the equipment's useful life and include a buyout option at the end of the term. Labs account for capital leases on their balance sheets, treating the leased equipment as a capital asset. Capital leases are suitable for labs that anticipate long-term, stable use of the equipment and desire ownership in the long run. While they require a more significant financial commitment upfront, they can be a cost-effective way to acquire valuable assets. They differ somewhat from operating leases.
Choosing the Right Type of Lease for Your Lab
Selecting the appropriate lease type depends on various factors, including the lab's research objectives, budget constraints, and anticipated equipment usage. You should consider the following when making this decision:
- Research goals and timelines: Assess the nature of your lab's research projects. Are they short-term endeavors with specific equipment requirements, or do they involve long-term, ongoing studies?
- Budget constraints: Evaluate your lab’s financial resources. Determine whether a lower initial financial outlay (as with an operating lease) or a structured pathway to eventual ownership (as with a capital lease or lease-to-own agreement) aligns with your budgetary considerations.
- Equipment longevity and technological advances: Consider the equipment's expected lifespan and the pace of technological advancement in your field. This will help you determine whether you need flexibility in upgrading or if a longer-term commitment makes sense.
- Accounting and financial reporting considerations: Understand the implications of each lease type on your lab's financial statements. Consult with a financial advisor or accounting team to ensure compliance with accounting standards.
By carefully weighing these factors, you can make it easier to identify and select the most suitable lease type that aligns with your research goals, financial capacity, and operational preferences. Leaning on a strategic decision-making process like this can set the foundation for a successful equipment leasing arrangement in the future.
Key Considerations for Equipment Leasing
Budgeting for Equipment Leases
Budgeting for equipment leases is a crucial step in ensuring the financial sustainability of your laboratory. Consider the following factors:
- Lease payments: Determine the total cost of the lease, including any upfront payments or down payments. Understand the frequency and amount of lease payments, confirm whether making the payments is feasible, and allocate funds accordingly.
- Ancillary costs: Account for any additional costs associated with the lease, such as maintenance, insurance, and potential taxes. These expenses should be factored into your budgeting calculations.
- Contingency fund: Allocate a portion of your budget for unforeseen circumstances or emergencies related to the leased equipment. This fund can cover unexpected maintenance or repair costs.
Selecting the Right Equipment
Choosing the appropriate equipment for your lab is a pivotal decision that impacts research outcomes and operational efficiency. Consider the following when making your selection:
- Research objectives: Ensure the equipment aligns with your lab's research goals and methodologies. It should have the capabilities and features necessary to carry out experiments effectively.
- Compatibility and integration: Confirm that the chosen equipment integrates with existing lab infrastructure, including software, data management systems, and other instruments. This helps you identify whether to upgrade or acquire additional software or instruments.
- Future-proofing: Consider the potential for future upgrades or expansions. Choose equipment that can adapt to evolving research needs to maximize lifespan and utility.
Evaluating Lease Terms
Understanding lease terms is essential for a successful leasing arrangement. Pay attention to the following aspects:
- Lease duration: Determine the optimal lease duration based on the anticipated lifespan of the equipment and the lab's research goals. If possible, strike a balance between flexibility and long-term commitment.
- Payment structure: Clarify the payment schedule, including frequency (monthly, quarterly, etc.) and method (e.g., electronic transfer, check).
- End-of-lease options: Thoroughly understand the options available at the end of the lease term, whether it involves returning the equipment, purchasing it, or renewing the lease.
Equipment Maintenance During the Lease Term
Proper lab equipment maintenance is essential to guarantee the longevity and optimal performance of the leased equipment. Consider the following steps:
- Adherence to manufacturer guidelines: Follow the manufacturer’s recommended maintenance procedures and schedules. This includes regular cleaning, calibration, and inspections.
- Documentation and record-keeping: Maintain detailed records of all maintenance activities, including dates, performed tasks, and any issues encountered. This documentation can be invaluable in case of future servicing needs.
- Timely reporting of issues: Promptly report any malfunctions, damages, or performance issues to your leasing partner. Timely intervention can prevent further damage.
Handling Lease Renewals or Expirations
As the end of the lease term approaches, you must decide on the equipment’s future in your lab. Consider the following options:
- Lease renewal: Evaluate whether renewing the lease is the best option for your lab’s current needs. Consider factors such as equipment condition, technological advancements, and budgetary considerations.
- Equipment return: If the equipment no longer aligns with your lab’s research goals, returning it at the end of the lease term may be the most prudent option.
- Equipment purchase: Assess whether purchasing the equipment at the end of the lease is viable and cost-effective, especially if it remains integral to your lab's operations.
By carefully considering these key aspects, labs can confidently navigate the renewal or expiration of their leases, ensuring that their chosen instruments align with their research objectives, budget constraints, and operational preferences.
The Drawbacks of Buying Equipment
Depending on the size and scale of your lab, you might be wondering whether buying your instruments is the best path forward instead. We’ve covered the benefits of an operating lease. Now, let’s look deeper into the pros and cons of buying lab equipment and compare leasing vs. buying.
Higher Upfront Cost
When you pay for your equipment with cash, you’re in for some hefty upfront costs associated with the purchase. Typically, these will run between 110% and 120% of the total equipment cost because you also have to factor in the additional charges of installation, training, IQ/OQ/PQ, freight costs, and taxes.
This significantly drains your working capital but provides you with complete ownership. At the same time, if you do choose ownership, you have no hedge against equipment obsolescence.
Expensive Ongoing Payments
The initial purchase price isn’t the only significant cash outlay to consider. You generally need to budget for service contracts, which will cost you approximately 15% of the equipment’s list price annually. On top of that, service contract costs increase annually when manufacturers increase their company-wide list prices at the beginning of each year.
Tax Breaks with a Catch
Paying for your laboratory equipment upfront will provide depreciation tax benefits, but the tradeoff is significantly reduced cash on hand. You may also need to depreciate the asset per the IRS MACRS chart, which can be lengthy, depending on the asset type, your company’s tax situation, and current regulations.
Effects on Your Credit
While paying in cash might seem like a great idea when you’ve got extra capital, know that it could harm your credit in the long run. Substantial reductions in your liquidity can make future borrowing much more difficult. Keep this in mind while reviewing your books and determining whether you have the cash available to justify an expensive upfront commitment.
Finding the Right Leasing Partner
Researching Reputable Suppliers and Lessors
Finding a reputable and reliable leasing partner is paramount when it comes to equipment leasing. Here’s how you can go about it:
- Industry reputation: Research the reputation of potential leasing partners within the scientific community. Look for reviews, testimonials, and case studies to gauge their track record.
- References and recommendations: Seek recommendations from colleagues, industry peers, or professional networks. They may have valuable insights or personal experiences with leasing partners.
Evaluating Leasing Partners
Once you’ve identified potential leasing partners, it’s important to conduct a detailed evaluation to decide the best fit for your lab’s needs:
- Experience and expertise: Assess the leasing partner’s experience in catering to laboratories and their understanding of the unique requirements of scientific equipment.
- Equipment portfolio: Examine the range of equipment available in their portfolio. It should encompass a diverse selection of instruments relevant to your research field.
- Customer support and service: Inquire about the level of customer support provided. A responsive and knowledgeable support team can be invaluable in addressing any issues or concerns.
- Lease flexibility and terms: Evaluate the flexibility of their lease agreements. Ensure that the terms align with your lab's preferences and operational requirements.
Understanding Terms & Conditions
Understanding what you may agree to is critical in establishing a mutually beneficial leasing arrangement. Consider the following strategies:
- Clear communication: Clearly articulate your lab’s specific needs and expectations. This transparency lays the foundation for a collaborative and productive partnership.
- Determine if customization is available: See if the leasing partner is willing to work with you to customize lease terms to better suit your lab’s unique circumstances. This may not be on the table, but asking doesn't hurt.
- Clarification of responsibilities: Ensure that all parties have a clear understanding of their respective responsibilities, including maintenance, repairs, and compliance with industry regulations.
Labs can forge strong and productive relationships with reputable leasing partners by conducting thorough research and evaluation and communicating clearly and regularly.
Some Legal & Financial Considerations
Navigating the legal and financial aspects of equipment leasing is crucial to ensure compliance and protect your lab’s interests. Here are key considerations:
Ensuring Compliance with Industry Regulations
Compliance with industry regulations is non-negotiable for any laboratory. When entering into an equipment lease, keep the following in mind:
- Regulatory standards: Familiarize yourself with the specific regulations governing the use and maintenance of laboratory equipment in your field. Ensure that your lab and the leasing arrangement align with these standards.
- Safety and environmental concerns: Verify that the leased equipment complies with safety and environmental requirements. This includes proper disposal protocols and adherence to hazardous materials regulations.
Understanding Tax Implications of Equipment Leasing
The tax implications (and advantages) of leasing equipment can significantly impact your lab's financials. Consider the following:
- Tax deductibility: Understand the tax treatment of lease payments. Depending on your jurisdiction, lease payments may be tax-deductible, providing potential cost advantages.
- Depreciation and write-offs: Familiarize yourself with the depreciation schedules associated with leased equipment. This knowledge can impact your lab’s financial reporting and tax liability.
- Consultation with a financial advisor: Seek guidance from a financial advisor or tax expert who is well-versed in the specific tax laws and regulations that apply to equipment leasing in your location.
Some Insurance & Liability Concerns
Protecting your lab from unforeseen events or damages to leased equipment is a critical aspect of the leasing process:
- Insurance requirements: Review the insurance provisions outlined in the lease agreement. Ensure your lab meets the necessary insurance requirements, including liability coverage and property damage protection.
- Liability Allocation: It can help to establish who is responsible for damages, repairs, or accidents involving the leased equipment. This should be outlined in the lease agreement to avoid potential disputes.
- Documentation and Reporting: Keep detailed records of any incidents or damages related to the leased equipment. Timely reporting to both the lessor and your insurance provider is essential.
Proactively addressing legal and financial considerations will help you address potential insurance or liability concerns. With a clear understanding of responsibilities, you can enter into an equipment leasing arrangement confidently, ensuring compliance, mitigating risks, and safeguarding your lab’s financial well-being.
Excedr’s Leasing Program vs. Traditional Financing
Other financing options can help you acquire the equipment you need and realize your vision. However, some differences between leasing and traditional financing can impact your company’s budget. Let’s break down the differences between Excedr leasing vs. traditional financing, starting with lines of credit.
Characteristics of Lines of Credit (LOC)
- The upfront costs of a LOC: Typically, paying for lab instruments with a credit line will cost about 1% to 2% of the availability on your line of credit, plus any additional costs you may incur for non-utilization. This can get expensive quickly.
- Delayed approval time: Due to the highly nuanced process of getting approved for a credit line, especially one that revolves (renewed annually), you could be looking at several months of cumbersome underwriting before you are given any indication of approval. It is also not unlikely that you spend all that time underwriting and are still denied at the end of the diligence process, meaning you would have wasted up to three months of potential equipment usage.
- Variable tax benefits: Due to cumbersome IRS depreciation rules, financing your laboratory equipment through a line of credit can be unpredictable. Depending on IRS tax codes, you may have to depreciate the asset according to the IRS MACRS chart, or you may be able to accelerate the depreciation. It will vary based on current regulations, which may change yearly.
- Reduced credit availability: This is the biggest downside to using a line of credit for outfitting your lab. Buying a fixed asset with a line of credit will reduce your available credit for other opportunities, limiting your future borrowing ability. If your brain is already running a mile a minute with projections of potential expenses, it is in your best interest to steer clear of the credit line option.
Characteristics of Bank Loans
When you finance your lab equipment through a bank, you’ll typically receive either a term loan or a credit line. Now that you’ve been given some background information on credit lines, let's break down the nuances of bank-term loans.
- Heavy regulations: Banks are heavily regulated because they rely on depositors’ money to fund their loans. This leads to highly stringent underwriting requirements and makes it rare for a laboratory to secure a loan. Banks can’t risk losing other peoples’ money or increased regulatory crackdowns. On the off-chance that a lab does get approved for financing from a bank, they’ll need to account for lengthy amortization schedules with complex long-term and short-term debt calculations, especially when interest rates are variable based on financial markets.
- Burdensome terms: The bank must protect its depositors’ funds at all costs, which means the laboratory pays the price. Terms of financing are typically not worth the burdens they are associated with, e.g., personal guarantees, debt covenants, collateral (IP pledges), liens against your company, inflexible payment plans, etc.
- Upfront costs: You would imagine bank loans have minimal upfront costs since the purpose of financing is to spread out your payments over time. However, this is not the case, as banks require large down payments to offset their risk. Excedr’s equipment lease program reduces these upfront costs. Down payments are usually 30% of the equipment cost by an average of 95%+ when financing with a bank, which is a steep price for any company.
- Variable tax benefits and slower approvals: Financing your laboratory equipment with a bank loan will yield the same tax benefits as a credit line, which may change year to year, depending on current IRS tax codes. When getting approved for a bank loan, you’re looking at trudging through the same lengthy underwriting processes as a line of credit, which can last months.
In this comprehensive guide, we explored the dynamic world of equipment leasing for labs, and we delved into the pivotal role equipment leasing plays in enabling labs to access cutting-edge instrumentation without the immediate financial burden.
From understanding the different types of leases to evaluating key considerations, we’ve equipped you with the knowledge to navigate the equipment leasing landscape confidently. By budgeting effectively, selecting the right equipment, and maintaining it diligently, labs can optimize their research capabilities and drive groundbreaking discoveries.
Choosing the right leasing partner, understanding legal and financial implications, and exploring real-world case studies have provided invaluable insights into the practical application of equipment leasing in the scientific community.
By strategically leveraging equipment leasing, labs of all sizes and stages can unlock their full potential and drive the discoveries that shape our world.
Lease with Excedr & Equip Yourself for Growth
Ready to upgrade your lab with advanced scientific equipment? We’re here to help you take the next step with flexible and cost-effective leasing options to help you get the necessary equipment. By partnering with Excedr, we can ensure your lab remains well-equipped and at the forefront of scientific innovation.
- Connect with Excedr if you’re interested in lab equipment leasing, don’t hesitate to reach out to Excedr. Our team of experts is dedicated to finding the best leasing solutions tailored to your lab’s specific needs.
- Request a Lease Estimate if you have a quote from a manufacturer. We can begin the approval process, which involves underwriting your company to understand your financial position better. If the underwriting goes well, we can provide a competitive lease estimate.