Obtaining financing can be a challenging part of opening and operating a medical practice; and while the process may seem daunting, it need not be. With a little prep work, the experience can go very well, and enhance your chances of receiving a favorable loan.

The first thing to know: business loans are not consumer loans! Whereas, rates and terms for auto and home loans can be secured over the phone or from a newspaper, commercial lenders must have a financial package to review before discussing how much a loan will cost you. The physician arriving at his or her favorite financial institution with a thorough financial package immediately makes a favorable impression, possibly making the difference between an approved loan or a denial.

At a minimum, your complete financial package should include:

• Copies of Personal Tax Returns, including all schedules, for the three most recent years.
• Copies of Business Tax Returns for established practices, including all schedules, for three most recent years.
• A current Business Financial Statement — no more than 90 days old.
• A Personal Financial Statement, preferably on the lender’s form.
• A detailed breakdown of the proposed loan proceeds.
• If the loan is for a new Practice, you must have a detailed Business Plan, including a one-year cash flow projection broken down by month.

   There are two types of business loans you will want to consider: Term loans and lines of credit.

Most full service commercial lenders will offer both products on a direct basis, or by utilizing a guaranteed loan program offered by the U. S. Small Business Administration (SBA). The government supported SBA loans are often more attractive because of longer loan terms, less stringent down payment requirements, less collateral needed, and no prepayment penalties.

Term loans have maturities of one or more years, providing permanent capital for your practice. The process goes like this: After the bank reviews your Personal Credit Report, they will review your Business Tax Returns to evaluate your ability to repay. Looking at your returns, they will then try to determine how much cash has been historically available to service the proposed loan; taking into account monies needed to maintain your standard of living. Even if you have excellent credit and good collateral, if your tax return indicates your practice has not generated adequate cash flow to repay, you likely will not receive the loan.

While your practice may have considerable business value, the equipment, accounts receivable and inventory provide little collateral support. That is why you will need to pledge assets outside the practice, normally your personal residence, or other real estate, to secure the proposed loan. At this point many borrowers ask, “If I have to pledge my residence, why not get a home equity loan?”
There are two reasons:

1. A home equity loan is a consumer loan and does nothing to establish credit for a practice that will most likely have future borrowing needs, and,
2. Home equity loans may interfere with your future borrowing needs, i.e. for home improvements or even the ability to purchase a subsequent residence.

   To address short-term working capital needs, a physician should obtain a business line of credit for the practice. The line of credit is for twelve months, after which it can be renewed. These accounts are used to pay ordinary business expenses — not for fixed assets or larger type equipment — until accounts receivable have been collected. As a matter of course, a line of credit should be paid to a zero balance for at least 30 days each calendar year. Keep in mind, if the line of credit is not paid to zero or does not revolve, the lender may choose not to renew.

With rates at historic lows, medical professionals should consider refinancing any practice debt with an interest rate over seven percent.

Other rate-driven considerations:

• Now would be a great time to trade the clinic’s lease payments for more permanent type mortgage payments.
• This may also be an opportune time to purchase a practice or start a new business. As a rule, most lenders will employ the SBA loan program which finances 80-90 percent of the transaction. You should beware of finance companies offering 100 percent financing, as their rates are often higher than normal bank rates, with stiff prepayment penalties.

   While securing a loan for your business may sound complicated, the whole process can be painless if you prepare well and deal with an experienced lender. You can expect to obtain your approval in seven to 10 days after submitting your complete financial package. The loan funding will come in as little as three to four weeks thereafter — taking slightly longer when commercial real estate is involved.

(Editor’s Note: Scott Harvey is Senior Vice President and SBA Manager for Kitsap Bank. A lending professional for over 23 years, he specializes in financing services specific to small business owners, including Physicians, Dentists, Chiropractors, Veterinarians and Accountants. Scott has been honored by the U. S. Small Business Administration with the National Financial Services Advocate Award.).