How can medical practitioners finance their growth?



Medical Economics: Where can I go for help with a loan or other financing? And what are the advantages and disadvantages of each source?

Julianne Andrews: Banks have historically been a good source of funding. Doctors really need to know that if they receive bank financing, the bank will need a personal guarantee from the practice partners, which simply means the bank lends money for the practice, but each partner will be personally liable if the practice fails to return it.

If you are eligible for an SBA (Small Business Administration) loan, the interest rate may be slightly lower because the bank has a guarantee from the SBA for this loan. So this is definitely something to explore.

Some practitioners are now looking to venture capital and private equity as funding sources. You must understand that in the case of venture capital or private equity, you are giving up something in return. For example, with venture capital, you’re likely giving up board seats and some decision-making authority. With private equity, you give up some capital in your practice in exchange for that funding.

But these are options, and in fact, these types of subjects are very interested in medical practice at the moment.

ME: Wouldn’t practice resist giving up the power or capital that comes with venture capital or private equity? What are the advantages over a regular bank loan?

JA: This is usually a completely different kind of transaction. Often, private and venture capital firms are interested in practices that have good, solid cash flow, are growing, and are actually interested in buying. This can work very well for practice with older doctors looking to retire and for some sort of succession strategy. It can also work for young doctors who want to be part of a larger group and are not interested in the administrative part of the practice. But this is a very different deal than just getting a loan to renovate your office or buy new equipment.

ME: Under what circumstances should a practitioner consider applying for a loan from the outside instead of trying to finance growth with its own revenues?

JA: You want to see how much cash flow you have and how big a purchase is compared to the cash flow you have and also compared to the cash that a practitioner might have in a bank. Interest rates are now extremely low, so getting a loan for large purchases makes sense. But you need to make sure that you have enough free cash flow to service this loan because, again, you may have to personally guarantee it if you get it from the bank.

This will mean that partners will have to submit tax returns, personal balances, and the like to demonstrate that in the event of default on the loan, partners will have the capital to take care of this.

Having said that, it is not the bank’s job to foreclose on the loan, so they will generally be very kind with the practice of drafting the terms of the loan. You saw this last year when we had a COVID revenues slump.

ME: Are they required to provide any collateral? And what kind of documentation do banks usually need when applying for a loan?

JA: They usually do not require collateral, but most loans are issued on a cash flow basis, so they will look at the practice’s cash flow, their historical income, their income and expenses to make sure there is free cash flow to pay off the loan. The bank will want to see tax returns, income statements and balance sheets over several years to make sure they have a stable history of good cash flow. As for a personal guarantee, a personal balance sheet and sometimes a tax return are usually required.

ME: What about lines of credit? When should you consider opening one and what should you use it for?

JA: I think practitioners should do this beforehand. By this I mean simply having a line of credit. They don’t need to use it, but it’s always good to get it when you don’t need it. When you need it, it will be more difficult for you to get it.

Determine how much you need – maybe three to six months of practice. So if you face a recession like COVID, you have something to come back to. Beware of using a line of credit as a way to spend more than the practitioner can afford. It should only be used for temporary shortages and then reimbursed immediately.

ME: At the start of the pandemic, did you have to rely on lines of credit just to stay financially afloat?

JA: And for those who had lines of credit, it was very beneficial. Many of the practitioners I work with took out loans for PPE, but these loans were not immediately available. It usually took 3-4 weeks to get these loans after Congress authorized them. Meanwhile, in many practices, their incomes have plummeted. If you were a therapist or pediatrician, no one would come for an examination in the midst of all this.

So the income dried up, but the practitioners wanted to keep their staff, and of course most of them rented their office space and the like. Many of the people I work with have received PPE loans and most of them are forgivable. But initially they needed this line of credit to support them until they received these government funds.

ME: Is there a difference between a line of credit and a revolving line of credit?

JA: I have already spoken about the revolving credit line. You have it in place, use it if you need it, then put it back. This is usually due to a specific maturity, and usually banks want to renew the term periodically because they will want to look at your income statements and balance sheets and make sure you can still pay off the line of credit if they use it.

Sometimes a practitioner will have a line of credit that is more dedicated to a specific purpose. For example, a business decides that it needs to reconfigure and renovate one of its offices, and it requires $ 100,000 to do this. They will go to the bank, receive a $ 100,000 line of credit, and use it in the implementation of the project. When the project is completed, it will turn into a regular loan with a specific maturity, and the line of credit will disappear.

ME: Is there an advantage to using this approach over just getting a loan?

JA: The advantage is twofold. First, sometimes when working on a project, you don’t know what the final cost will be, so this gives you a little more flexibility. You also only pay interest on what you have already used. In most cases, this may be preferable.

Now it depends on preliminary negotiations, because banks may or may not want to set the terms of the final loan for 6 or 12 months. So if you can’t get them to agree to a specific term of “five years at that interest rate,” you might be better off just saying, “Okay, this is a project, just go ahead and deduct us $ 100,000 and let’s set the terms right now. “. Ultimately it just depends on what you can do with the bank.

ME: Are there common mistakes you see when practitioners seek funding?

JA: The biggest problem that the practice has problems with is borrowing too much. If the practice grows quickly and opens new offices, purchases equipment and expands its staff, that’s fine, but often they take on big debts to do it all because they don’t have the income yet to pay. for all this.

Usually you see the practice grow rapidly and use up large debts to pay for the growth, and then there is a recession or maybe one of the doctors becomes disabled. Any of these things can seriously impact your expected income stream, and this is where you run into trouble.

Another option is to pay for growth with cash flow. The problem for doctors is that it really has to do with their income. This is a compromise.

ME: Has the pandemic had any impact in terms of funding the practice?

JA: Initially, the situation was very difficult for many practices, because their income streams were almost zero, and most of their expenses were fixed – personnel, equipment and offices. Most practitioners don’t keep much cash. Therefore, banks often ask for personal guarantees.

For many practitioners, PPP credits (Paycheck Protection Program) were really critical. I have had medical clients who said, “I never thought this would happen to me, but I might have to close my practice.” It was excruciating to watch them go through this. And the process of obtaining loans was difficult and stressful. This highlights why you should have security systems like a line of credit, because you just never know what’s going to happen.

ME: So far, we have talked about existing practices. What about new practices? Where can they apply for funding to start an internship?

JA: Usually, in such cases, the bank will consider an individual applicant because there will be no income statement or balance sheet. Many banks have special areas that deal with medical practice and doctors, and will provide them with favorable conditions, because you, as a bank, will feel pretty good that it is a viable organization.

I’ve seen cases where doctors started practicing using things like a home equity line of credit, which is very risky because it really puts your personal finances at risk. But usually it will be more of a combination of your home equity and bank lines of credit.

ME: What about making a decision to buy or rent new equipment? What are the advantages and disadvantages of each?

JA: This is a key decision that many practitioners face. If this is a piece of equipment that you intend to change every few years because technology changes, then you probably want to rent it out. On the other hand, if you think this is a piece of equipment that you can use for five, eight, 10 years, you probably want to buy it. You can buy it immediately for cash or get a loan from the bank.

The advantage of using a loan is that the conditions will usually be slightly better. [than with a lease] and when the practice pays off the loan, they own the equipment and can amortize it, which gives tax advantages.

ME: If you rent, is it done directly from the manufacturer?

JA: Either the manufacturer will take over the lease itself, or it will have some kind of financial department that will deal with the lease. And the lease will have an interest rate, an associated term and a final cost. Thus, a practitioner can ask for their financial assistance to weigh the trade-off between buying and leasing, especially since there are tax considerations for everyone.

ME: Can any terms and conditions be negotiated?

JA: They can be. Particularly from the purchase side, depending on your credit history and your relationship with the bank. Rentals are generally slightly less, but there may be some room to negotiate better terms depending on the size of the practice and the dollar amount of equipment being rented.

ME: Returning to venture capital and private equity, why are they now showing more interest in medical practice and what should the practitioner think about when considering whether to get funding or sell themselves to one of these firms?

JA: The business model for private and venture capital companies is to invest in a business such as a medical practice, grow it, make it more profitable, and then give that investment, usually to another private or venture capital firm. The reason for the increased interest in medical practice is that traditionally they have had a very predictable cash flow, which is very attractive for a private equity firm that bases its decisions on cash flow.

As such, they are looking for high free cash flow practices that are growing and where they believe they can help the practice grow faster by injecting additional capital and returns on their investments.


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