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Technology Financing: Considering the Options

by Will Lockwood

Ann Steve Hunter 1Pharmacy owners share how the options available to finance a major technology investment let them move forward more quickly to make business decisions.

It’s natural to consider financing a big expenditure, which in pharmacy might mean a big piece of technology hardware or a significant store remodel. But when it comes to smaller-scale investments, with price tags well short of six figures, financing may not be at the front of many pharmacy owners’ minds.

However, whether you are looking at getting that one piece of technology in sooner than an outright cash purchase might allow, as was the case for Ann Hunter, B.S.N., co-owner of Hunter Pharmacy in Connellsville, Pa., with her husband Steve Hunter, R.Ph., or being smart about how you use your cash when outfitting multiple locations, as was the case for Jeff Harrell, Pharm.D., co-owner of Peninsula Pharmacies with six locations in Washington state, owners can find a great deal of value in financing across a wide range of investment levels.

Getting an Immediate Impact

Financing came into play at both pharmacies when the owners made the decision to install Kirby Lester tabletop counting technology and were looking for the best way to get the benefits of the technology right away without breaking the bank.

At Hunter Pharmacy, the motivation was twofold: create the right kind of practice environment and support growth. “We looked at tabletop counting and we saw it giving us a level of quality assurance that would be a big help when we’re trying to keep our staff levels controlled,” says Ann Hunter. “I feel like sometimes in community pharmacies we’re really wearing a lot of hats. The pharmacist is trying to do a lot of things: counseling, synchronization, and MTM [medication therapy management]. This technology creates an extra layer of assurance for our pharmacists and is an asset that we’ll point to in the future when we look to hire a pharmacist.” Ann and Steve Hunter did their research earlier this year and ultimately came to focus on the KL1Plus from Kirby Lester. But they also came to the realization that a cash purchase would have to wait until the fall. “We didn’t set out thinking about financing as an option at all,” says Ann Hunter. “Then our Kirby Lester sales rep mentioned it, and we decided to consider it as a way to get the technology in our store right away.”

For Jeff Harrell and his co-owners, financing meant that they were comfortable going all-in with their plan to purchase tabletop counters, again the KL1Plus, for all six Peninsula Pharmacies locations. “We wanted to eliminate any verification errors, miscounts, or issues with customers claiming we shorted them,” says Harrell. And these are not issues that the Peninsula Pharmacies ownership wanted to solve piecemeal. “You only get the benefits if this technology is used uniformly and consistently,” says Harrell. This meant buying a KL1Plus for each pharmacy about a year and a half ago. Harrell reports that he liked the counters so much that he bought another three units about six months later, so that now three stores have two, one for each technician.

The financing in both cases was provided by Kirby Lester Financial Services, backed by Americorp Financial.

The ability to have the technology in place sooner rather than later at Hunter Pharmacy may lead to a further investment as well. “As we’re using the KL1Plus and seeing the benefits of it to our retail practice,” says Hunter, “it’s helping us understand how a second counter will be something we’ll find useful for our assisted-living component. Financing means that we are gaining the benefits and experience affordably, when otherwise we would have still been waiting.”

Watching Your Cash and Your Bottom Line

While Ann and Steve Hunter were faced with the basic, binary decision of finance now or buy later, Jeff Harrell’s decision derived from his philosophy that it’s always wise to maintain a cash cushion to help smooth out the various cashflow issues that pharmacies deal with annually. “I’d rather finance when I have the opportunity and can get good terms,” says Harrell, “and keep the cash around to make sure we’re hitting payrolls, A/P, and other demands that only cash can meet.” Harrell points out that leasing also allows Peninsula Pharmacies both to depreciate the hardware and to write off the interest as a business expense over the course of the payments. This is an even better approach, since Harrell expects that these Kirby Lester counters, which he reports are very sturdy and easy to maintain, will have a useful life at least twice that of the loan term.

For Ann and Steve Hunter, it was important to find the balance between the extra costs of the lease and the benefits of getting going with the technology. “When you look at things from a business perspective,” says Ann Hunter, “sometimes paying that interest actually makes sense because you’re doing something more with your resources than you would otherwise be able to. The lease proposal helped us to take a look at it and think: ‘We can do this now.’”
Going Over Your Options

Of course, it’s valuable to be able to consider all your options in this kind of scenario. And to do that, you need to know just what those options are. Hunter Pharmacy and Peninsula Pharmacies both took advantage of lease-based vendor financing, but, as Jeff Harrell points out, you might also consider an outside company that specializes in equipment financing, an acquisition-specific loan from your local bank, or even tapping a general line of credit that you’ve established.

We’ve already seen the power of financing with your vendor, and working with a separate specialty finance company should be similar. Next, bank loans can offer appealing terms and rates, in Harrell’s experience, and, depending on the amount of the loan, don’t even require a personal guarantee. And then there’s using a line of credit for your business, something Harrell reports Peninsula has for all its pharmacies. “This is mostly just for the rainy days,” he explains. “It amazes me how many pharmacies out there don’t have a decent line of credit. I think you want to have about $50,000 for every $2 million in sales, roughly.” These lines of credit usually have reasonable interest rates and offer the flexibility to pay back either a minimum amount monthly or as much as you feel ready to without penalty. On the other hand, notes Harrell, it’s usually best to use these lines to address short-term needs and repay the drawdown promptly — for example, when you have a big bill coming due from your wholesaler — rather than paying for a technology acquisition over the course of several years.
Flexibility Is Your Friend

One of the real benefits of financing technology is maintaining the flexibility to run your business the way you want to. And this means being very careful to read all the fine print in any loan documents. “Make sure that there are no penalties,” advises Harrell. “You want to be able to repay the loan if you need to or want to, and you want to be able to just run it out to term if that’s your best option. In the independent retail pharmacy, I want to have as many options for as many things as I possibly can, because you never know what the situation is going to be.”

Understanding just how much flexibility is in a set of loan terms isn’t complicated stuff, according to Ann Hunter. In fact, the Hunters found the whole process of financing through Kirby Lester to be very straightforward. “It’s very similar to leasing a car,” she says. “There are the different terms — 12 months, 24 months, 60 months — and you fill out some basic paperwork. In our case the paperwork wasn’t overly complicated, and the financial documentation wasn’t burdensome.”

Still, both Ann Hunter and Harrell advise having a lawyer or accountant review any financing documents. “We had a good idea of what we thought we’d be comfortable with for our monthly budget,” says Hunter, “but we still had our accountant confirm that it was a reasonable amount and offer guidance on the term length that would make the most sense without getting into a lot of extra costs from the finance charges.”
Learning and Sharing

There are a few other lessons that Harrell and Ann Hunter feel it’s worth sharing. First, Jeff Harrell speaks from experience when he emphasizes just how important attention to details is in order to avoid unpleasant surprises down the road. “I financed a couple of the big robots, and I’ll admit that I didn’t look at the fine print,” Harrell says. “We had a 6.5% penalty for early payoff on one several-hundred-thousand-dollar machine. And then I had one that if we paid off the loan early, they wrapped all the interest into the payment. I didn’t realize that until we were selling part of our business and I talked to that vendor and found out that we were on the hook for all the interest. So I’ve learned the hard way that you definitely want to pay attention to all the financing terms, and it helps when you are busy to have a professional take a look, too.”

Next, it’s important to keep in mind that even though equipment financing like this is relatively short-term, there’s still the distinct possibility that there will be some change in your goals and needs for your business. So even with flexible terms, you still want to think carefully about the technology you are bringing in, advises Ann Hunter.

First and foremost, she recommends taking care to finance only what you can afford. “There are a lot of different types of counting technology and robotics out there,” she says, “and we may yet like to add more technology like this to the pharmacy, but we’re also very careful of the bottom line.” It is, in her view, more important to get the technology in place that’s right for your pharmacy now, than it is to figure out the most clever way to finance the biggest purchase you can. “Step back and choose the technology that’s going to be most advantageous for your pharmacy now, and then down the line,” says Hunter. “You don’t want to jump into something that you’re then going to change your mind and find something else. Do your research first, and then you’ll be sure that what you’re leasing is going to help you grow your business.” CT

Will Lockwood is VP and a senior editor at ComputerTalk