How practices fund a fitout
Four ways the money usually arrives, what each costs you in control, and the question a lender will ask that most applicants have not thought about.
The short answer
Most practices fund a fitout with a combination rather than a single source, and the mix matters more than the headline rate. What follows is how the money usually arrives and what each option actually costs you.
Key points
- Match the term of the money to the life of the asset, and to the term of your lease.
- Equipment and building work are usually funded separately, on different terms.
- A landlord contribution is the cheapest money available, and it is negotiable.
- Lenders ask how long your lease runs. A short term with no option is the common blocker.
Most practices fund a fitout with a combination rather than a single source, and the mix matters more than the headline rate. What follows is how the money usually arrives and what each option actually costs you.
The four sources
Equipment finance. Chattel mortgage or lease against the equipment itself. Straightforward, because the asset is identifiable, movable and has a resale market. Terms typically run three to five years, matching the life of the gear. Most dental and medical equipment suppliers have finance arrangements attached, which is convenient and not always the cheapest.
A business or professional loan for the building work. This is the harder half, because a fitout is not movable and has little resale value to a lender. Some lenders treat healthcare professionals as a lower-risk category and will lend against practice cash flow or goodwill rather than the fitout. Terms are usually longer than equipment finance.
A landlord contribution. The cheapest money in the project, because it is a discount on the deal rather than borrowing. It is also negotiable and routinely under-asked for. How it is structured changes what it is worth, which is covered in lease incentives and fitout contributions.
Cash. Cheapest of all in interest terms and the most expensive in opportunity terms, because a new practice needs working capital more than it needs a lower interest bill. Draining reserves to avoid borrowing is a common and painful mistake in the first six months of trading.
Match the term to the asset, and to the lease
The principle that prevents most of the trouble: do not fund a long-lived thing with short money, or a short-lived thing with long money.
Equipment lasts five to ten years and should be funded over something like that. A fitout lasts the term of the lease and should be funded over something like that. Funding a fitout on a three-year facility when the lease runs seven produces a cash flow problem in year three that has nothing to do with how the practice is trading.
The lease is the constraint people miss. A fitout is worthless to you the day the lease ends, so no sensible structure amortises it past that date. If your lease has three years to run and no option, the honest answer is that this fitout has three years to pay for itself, and that should change either the scope or the lease before it changes the finance.
The question a lender will ask
How long is your lease, including options.
It is the first thing a credit assessor looks at on a fitout facility, and a short remaining term is the most common reason an otherwise sound application is declined or shortened. Sort the lease term before you apply, not after, because renegotiating a term while a loan is pending puts you in the weakest possible position with the landlord.
They will also want the things any lender wants: a business plan with realistic patient volumes rather than optimistic ones, personal financials, and evidence of the practitioners' income history. If you are buying an existing practice rather than starting one, they will want its financials too, and the building diligence in what to check when buying a practice becomes part of the same conversation.
Who owns what you built
This decides the tax treatment and it follows from how the work was funded.
If you fund the fitout, it is generally your asset and you claim the relevant capital works and depreciation deductions. If the landlord builds it under a landlord works arrangement, it is generally theirs, and you claim nothing. A cash contribution sits between the two and depends on how it is documented, which is exactly why the documentation should be deliberate rather than a line in a letter of offer.
Get your accountant across the structure before anything is signed. The treatment of an incentive or a contribution cannot be adjusted retrospectively, and the difference over a lease term is real money.
Practical sequence
Establish the lease term first. It sets the ceiling on sensible borrowing and it is the first question you will be asked.
Get the contribution negotiated at heads of agreement, before lawyers are engaged and while the landlord still wants you.
Split the application. Equipment finance and building finance are different products with different security and different terms. Bundling them tends to produce the worse of both.
Budget the whole project, not the build. Fees, IT, furniture, working capital and rent through construction are all real, and a facility sized only to the builder's contract runs out before you open. The full picture is in what it costs to open.
Sources and further reading
ATO guidance on capital works and depreciating assets, and NSW retail leasing material on incentives and disclosure. General information about how these arrangements work, not financial, tax or credit advice on your circumstances.
Capital works deductions and depreciating assets, which is how a fitout and a landlord contribution are actually treated at tax time.
The Retail Leases Act 1994 framework and the disclosure a landlord owes a tenant, including on make good and outgoings. Every state has its own equivalent.
A plain-language guide to retail leases: starting one, rent reviews, assignment and disputes. Written for tenants rather than for lawyers.
Commonwealth guidance on registrations, licences and the obligations that come with employing people.
Questions
How do most practices pay for a fitout?
Usually a combination: equipment finance against the chairs and imaging, a business or professional loan for the building work, a landlord contribution negotiated into the lease, and some cash. The mix matters more than the headline rate, because equipment and building work carry different security and different terms.
Can you get finance for a fitout?
Yes, though it is harder than equipment finance because a fitout is not movable and has little resale value as security. Several lenders treat healthcare professionals as a lower-risk category and lend against practice cash flow rather than the asset. The remaining lease term is the factor most likely to decide the outcome.
How long should I finance a fitout over?
Not longer than your lease. A fitout is worth nothing to you once the lease ends, so amortising it past that date creates an obligation with no matching asset. If the lease has three years to run, the fitout has three years to pay for itself, which is a reason to fix the lease term before fixing the finance.
Is a landlord contribution better than a loan?
Almost always, because it is a discount on the deal rather than borrowed money. It reduces the capital you need to raise, which is usually the binding constraint. The caveats are that incentives are amortised and clawed back on early exit, and that how the contribution is documented affects who owns the fitout for tax purposes.
Who owns the fitout for tax purposes?
Generally whoever funded it. Fund it yourself and it is your asset with the associated capital works and depreciation deductions. Let the landlord build it and it is usually theirs. A cash contribution depends on the documentation, which is why the wording should be settled with your accountant before signing rather than interpreted afterwards.
Send us the floor plan
A site assessment tells you what the tenancy can take and what it will cost to get there, ideally before you have signed for it.