By Lisa Wood, MBA Senior VP, Medical Industry Specialist, Iberia Bank
The practice of medicine is an increasingly complicated and competitive process in which success can be determined by an organization’s ability to adopt and maintain skill sets more commonly associated with the boardroom than the examination room.
This is especially true when a medical practice is interested in a business loan for a working capital line of credit; a loan to acquire equipment; to purchase a building or expand or remodel office space. There are many types of financial arrangements available and it is beneficial for borrowers and lenders to work together on the most appropriate choice.
In some cases a revolving line of credit is appropriate. This allows the borrower access to pre-approved funds as needed for seasonal or periodic expenses, which are then repaid in a prescribed manner. The term is usually one to two years, but can be renewed as needed based on mutual agreement.
Term loans, the most common method of borrowing, provide an amortized loan for a specific time and purpose. Repayment takes place with installments over the life of the loan – much like a car loan. Balloon loans apply similar terms for a short period of time – but require the balance to be paid off or new financing arranged at the end of the life of the loan.
Bridge or bullet loans offer short term financing in anticipation of a specific event – such as providing financing to start construction of a new house until a former residence is sold in the world of real estate.
The initial meeting with a prospective lender should allow ample time for discussion of the loan request and evaluation of financing options. It is best to schedule the initial meeting at a time when the office is closed to patient appointments and distractions can be avoided.
Your banker will want to understand your practice and how it operates as well as the purpose for the loan and how it will benefit your business. Depending on the scope of the loan arrangement, it may be appropriate for a business manager, industry consultant or financial expert participate in the discussion. Working with bankers who have knowledge and experience in the medical industry will be a benefit throughout the process and can make the process go much smoother.
The banker’s considerations in evaluating a loan request are usually simple: the purpose of the loan and how it will be repaid.
Having detailed information and an itemized schedule of anticipated expenses associated with the loan is important. Sales contracts, price quotes for equipment, written estimates from contractors and other expenses will help document the amount of the requested loan. Having an organized package ready to hand to the prospective lender during your meeting will both facilitate the process and demonstrate to the lender that you have given complete thought to your needs.
To demonstrate credit worthiness, be prepared to provide the most recent three years of business financial statements – including balance sheet and income statements – and year-to-date financials if more than three months into a new year. Personal guarantors will need to provide individual financial statements and three years of the most recent personal tax returns.
For a line of credit, be prepared to provide an accounts receivable summary report.
New business ventures or expansions will require detailed projections for the first three years of operations. For a line of credit, be prepared to provide an accounts receivable summary report.
Following the meeting between the prospective lender and borrower, the banker starts the underwriting process using the information and financial data provided. Bankers use a universal set of criteria referred to as the Five C’s of Credit.
These include character, involving credit reports, background checks on owners and personal guarantors and general reputation in the industry. Collateral is the value of assets that will serve as collateral to the loan, which can be based on appraisals or invoices and the borrowing base for an accounts receivable-based line of credit. ▼