An In-Depth Guide to Equipment Leasing for the Life Sciences
Last Updated on
February 7, 2022
By
Excedr
Last Updated on
February 7, 2022
By
Excedr
You're on the Verge of a Scientific Breakthrough, and you know that you need industry-leading, best-in-class lab equipment to bring your innovation to fruition.
There’s just one big problem.
Outfitting your lab with the right equipment can present an enormous financial burden. One that slows down progress on critical discoveries, depletes finite budgets, and inhibits your team from conducting their research.
Fortunately, there is an optimal procurement solution for the modern lab – one that provides the financial and operational flexibility you need to meet your R&D and commercialization goals: lab equipment leasing.
Consider leasing your lab equipment instead of committing a considerable capital outlay upfront.
In this guide, we review five considerations a company should make before procuring instrumentation:
As you learn about your financing options, you’ll want to understand some key structural differences between operating leases vs. capital leases.
TL;DR: operating leases are rentals, and capital leases are debt.
That said, these are essential nuances – especially when it comes to accounting and doing your taxes, so let’s dive into the details.
With an operating lease, your payments are considered to be a part of your company’s operating expenses; therefore, you’ll record them as rental expenses on your income statement and benefit from any corresponding tax deductions related to renting an instrument (much like if you were renting office space).
Operating leases are also not recorded as debt, which means they are significantly less cumbersome regarding contract terms.
With a capital lease, in the eyes of the IRS, you’re taking out a loan for your lab equipment. So instead of recording rental expenses on your income statement, you will record a debt on your balance sheet along with the corresponding principal payments.
Capital leases also come with the burdensome terms of a bank loan since they are identical debt instruments.
Capital leases, like debt, accrue interest. When tax season comes around, under current IRS rules, you can deduct the interest expense, but these deductions are typically lower than the rental expenses of an operating lease.
Some people shy away from leasing lab equipment due to common misconceptions. Let’s take a moment to set the record straight and dispel some major leasing myths.
This may be true for a majority of leasing companies, as they often have contractual obligations to specific manufacturers, but it does not apply to Excedr. We’re committed to providing custom solutions for every lab because we believe in the importance of every scientific endeavor, no matter how niche.
If you need an instrument that isn’t listed on our site, we will happily find a leasing solution to meet your needs regardless of make or model.
Leasing is actually a cost-effective way to acquire fixed assets (equipment) because of the financial benefits related to return on investment and capital allocation.
Where purchasing ties down your cash in a depreciating asset, leasing allows you to invest your cash in higher ROI opportunities - like hiring talented scientists who will develop or commercialize your company’s invaluable intellectual property.
You rely on equipment and technology daily to operate and grow your business, but ultimately the value of those products comes from using them, not owning them.
A good leasing company prides itself on transparency throughout the process. At Excedr, what is due is clear from the beginning of your lease experience with us. You won’t have to pay any hidden fees, ever. You pay for the instruments you rent and excellent service – and nothing more.
The equipment most suitable for your mission today might not be required in five years. And we also understand that laboratories may need to expand, upgrade, or renew instrument leases as their company grows.
This is why we offer a wide range of lease terms, ranging from a minimum of two years to a maximum of six years, with custom payment schedules and flexible end-of-lease options. All of these features can be structured to your company’s unique financial and operational needs.
One of the savviest ways to substantially reduce leasing costs is to share your equipment with a neighboring lab, and we encourage you to do so when your budget is tight.
We only ask that you let us know who you want to share your equipment with, and we’ll work out a practical plan for both parties.
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.
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.
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.
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.
Cash payments eliminate the need for an approval process. This is one of the main reasons some laboratories purchase equipment upfront and own it immediately.
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.
You most likely have decided that you don’t want to pay for your equipment with your own cash upfront. And you’ve undoubtedly heard about other financing options that can help you realize your vision.
Let’s break down the differences between Excedr leasing vs. traditional financing, starting with credit lines.
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.
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 very end of the diligence process, meaning you would have wasted up to three months of potential equipment usage.
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.
This is perhaps the biggest downside to using a line of credit for outfitting your lab. When you buy a fixed asset with a line of credit, you’ll reduce your available credit for any other opportunities, limiting your future borrowing ability. So, if your brain is already running a mile a minute with projections of potential expenses, it could be in your best interest to steer clear of the credit line option.
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.
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.
This makes sense – banks simply 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.
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.
You would imagine bank loans have minimal upfront costs as the purpose of financing is to spread out your payments over time, but 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.
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. Also, 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.
You may not require the newest next-generation technology to complete your assays, depending on your research. But because of the strict requirements associated with bank loans, refurbished and used equipment is often not an option as it typically does not meet their collateral standards.
If, by this point, you’re convinced there’s no way you will endure the arduous process of securing a line of credit or bank loan, your attention may turn to an independent leasing company instead. Here’s what you need to understand about this option.
Independent leasing companies require the funding of outside investors, including pensions, endowments, family offices, etc. These institutional investors each expect to return a profit, which means you’re not only paying the leasing company but their investors too. Because of this, you can expect the cost of your leases to be much higher to compensate for this dynamic.
Contrastingly, Excedr is unique because we do not answer to outside investors. We underwrite and fund every lease with our capital, enabling us to bring you the best value.
Independent leasing companies tend to have short-term investment time horizons because their investors are eager to realize gains on their capital contributions. Instead of focusing on long-term growth – and maintaining a client-first mindset – most independent leasing companies are concerned with returning investor principal and profits in three to five years. Simply put, they focus on making money, not advancing your company’s mission.
This is not the case with Excedr. Since we do not answer to outside investors, we prioritize our client’s interests first and adopt an incredibly long-term growth mindset that spans many decades rather than a handful of years. Excedr has flexibility and customer alignment that no other leasing company has.
While raising capital through the sale of shares is a viable fundraising route for many laboratories, it has its pros and cons.
Equity investment is the most expensive form of financing an entrepreneur can secure, but it is also the most lenient as it does not require the same downside protections a bank loan would (e.g., personal guarantees, debt covenants, collateral, IP pledges, liens, etc.). It also does not require scheduled repayment, which makes it “patient capital.”
Essentially, you’re exchanging ownership of your company for the funds they invest in you. This means they’ll have legal rights to their fair share of profits - proportional to the percentage of ownership they’ve been allocated in your company.
Profits aren’t the only thing you give up when an equity investor enters the scene. Remember that they’ve invested in your company because they see the profit potential and will do everything possible to steer the ship in the direction they see fit. This often means they’ll claim a seat on the board and call some of the most critical shots.
With Excedr, you’ll enjoy the same lenience and patience you would with equity financing — without ever having to let an outside party take the wheel.
Of course, there’s always one last option for financing the lab: bootstrapping. You can often bootstrap your business (for a period of time, at least) by using your personal savings or fundraising through personal connections.
If your network is large enough and you have the means to get viable instruments through the door, then it could be a procurement method to consider. But there are two significant risks to bootstrapping your company.
Personal fundraising can be both uncomfortable and risky because it gambles the livelihood of friends and family to outfit the lab. While you no doubt want your research to succeed, garnering the funds from personal connections can add unnecessary pressure and anxiety. It all depends on your tolerance and honest assessment of your relationships.
Most people don’t have enough cash to fund a capital-intensive laboratory for a very long time. And those who do typically aren’t willing to contribute more than once as it is a high-risk investment.
So when upgrading your lab equipment or buying different instruments for a new project, you’ll probably be forced to find a more sustainable financing source.
This is where Excedr can be of assistance. Regarding lab equipment leases, we can be the one-stop shop for all your instrumentation needs. We pride ourselves on being a reliable source of capital for entrepreneurial scientists.
First, let’s talk about why you should lease your lab equipment with Excedr and the benefits.
You must maintain healthy cash flows from one quarter to the next for your lab to thrive. This becomes especially important when financial markets tighten, and you need to have a cushion of cash on hand for unexpected opportunities or emergencies.
Unfortunately, traditional procurement options for lab equipment either drain cash balances or require founders to put up personal assets and collateral to secure credit lines. This leaves scientists more focused on cutting their expenses to stay afloat than investing in operations to make their next significant discovery in the lab.
Instead of falling victim to out-of-date procurement options, Excedr provides an innovative and founder-friendly operating leasing model that equips labs with superior technology without dipping into your precious cash reserves required to reach your milestones.
So how exactly does leasing equipment through Excedr save you time and money?
Lowering your upfront costs frees up your budget so that you can focus on your lab’s research. If you opt to purchase lab equipment, you will end up eating all of the equipment costs the moment you issue your purchase order (PO), in addition to the fees for installation, training, service contracts, shipping, and sales tax assessed on all of the expenditures mentioned above.
Excedr’s equipment lease program reduces these upfront costs by an average of 95%+ to minimize any financial strain that impedes the progress of your research. to minimize any financial strain that impedes the progress of your research.
In most instances, we require just two monthly payments as a security deposit to get access to best-in-class equipment. This preserves your working capital to reinvest your cash in business development (locking in strategic pharma partnerships, securing revenue streams, etc.) and operations (hiring brilliant Ph.D. scientists, purchasing mission-critical consumables, etc.)
Excedr’s monthly payments remain affordably fixed throughout your lease term and can typically be customized based on your lab's needs (cash flow, budgeting, grant cycles, or any seasonal fluctuations).
In contrast, purchasing lab equipment leads to unexpected expenses due to rising annual service contract costs or exorbitant “time & material” repair/maintenance bills.
Additionally, Excedr can leverage its vast financial and vendor network to keep prices low while offering the widest selection of lab equipment to meet your lab’s specific requirements. You’ll never have to worry about hidden fees or wild fluctuations in price due to volatile financial markets when working with us.
Excedr’s unique underwriting process allows our clients to hit the ground running. Imagine how much faster your laboratory can introduce key innovations to the world without sluggish financial markets and their grueling, lengthy underwriting procedures holding you back.
Our lessees enjoy a swift approval process that typically takes between 1 and 3 days, with less burdensome documentation requirements than other financing options. Our goal is to speed you up, not slow you down.
There’s nothing worse than grinding for months on end through a lengthy study, only to watch your key instruments sputter and fail at the most pivotal moments. Equipment downtime can cause indefinite delays and require a hefty sum of money to fix.
Our equipment lease program offers comprehensive corrective repair coverage to keep assays running smoothly from start to finish. We also offer annual preventative maintenance coverage to prevent breakdowns from occurring in the first place.
Maintaining cash on hand and access to credit is essential when surprise expenses crop up in the lab – or when you need to seize a business opportunity to further your research.
When you choose our lease program, you won’t have to worry about increased debt-to-equity ratios or cash being tied up in rapidly depreciating assets. In other words, you will not negatively affect your ability to borrow or fundraise in the future when leasing with Excedr.
Growing a business requires flexibility because your operational and financial needs shift proportional to your scale as you grow. Excedr’s leasing model allows you to choose the best equipment to meet your current needs while offering the flexibility to upgrade to newer instruments when your research calls for it later.
At the end of the lease, you can also cost-effectively renew or purchase outright if you prefer to own the equipment. You choose which option is best for your team.
The IRS currently considers operating leases a tax-deductible overhead expense — NOT a purchase. And this is excellent news for the lab. Because instead of paying for equipment with after-tax profits, you can use your pre-tax dollars and save significant cash.
As you can see, there are multiple avenues for acquiring lab equipment. However, none are as robust as leasing through Excedr.
Excedr leases are a cost-effective and flexible option backed by a team of committed service providers behind you every step of the way. We are dedicated to your success and are hyper-focused on helping you achieve your R&D and commercialization goals at light speed, keeping a client-first mentality with every lab we serve.
Our dedicated Customer Success Manager will ensure your laboratory is in the best position possible to advance your key objectives quickly.
When you lease with us, you can access white-glove freight/installation, comprehensive technical training, and a full suite of ongoing services. We’ll be at your side every step of the way, along with the experts who manufacture the equipment.