Considering Practice Debt
A short-term
loan may solve a medical practice’s temporary cash flow problem. And longer-term financing of an investment in equipment, services or office space may
help fund practice growth. But before you borrow, carefully evaluate your
need plus the terms offered by several different lenders. With the
significant changes in the banking community over the past six months,
medical practices are finding it a challenge to find affordable financing
options with reasonable terms. Has your bank changed key terms of your loan?
Has your bank required more equity or faster amortization of debt? Have fees
been increased? Are you now being asked to move your banking relationship
before a proposal is submitted? For some, the ability to obtain financing
has become a major challenge.
Financial Health
Don’t let debt financing be the first answer to a financial need. Simply
keeping your practice’s finances in good shape could make financing
unnecessary or reduce the amount you have to borrow. Regularly monitor your
practice’s financial performance. And make sure you have effective controls
and procedures in place to accelerate cash flow and prevent disbursements
from overrunning receipts. For some, setting aside a small amount of capital
each year can reduce the need for financing and position the organization to
obtain very attractive financing terms when the need arises as the medical
practice will have a strong capital base. However, this is not easy to
accomplish in an era where reimbursement is declining and overhead is
increasing.
Even with financial discipline that ordinarily allows you to “pay as you
go,” financing may be necessary for an expenditure that current cash flow
cannot support. For example, you might require short-term credit in an
emergency or to smooth seasonal cash flow variations. And you might need
long-term funding to purchase equipment, expand or renovate your office or
acquire a business property. If debt is a requirement, you will need to take
the time to review your operation to place it in the best position possible.
Is your balance sheet reconciled and current? Are your current assets
(uncollected accounts receivable) readily understood and positioned to
assist you in maximizing your financing needs? Have you obtained updated
personal financials for your shareholder/member physicians?
Funding new equipment or a new service may require borrowing only during the
start-up period—until profits from the investment cover the ongoing costs. A
secured commercial loan will typically offer the most competitive interest
rate. But whatever terms you seek, a strong overall financial condition
generally makes it easier to qualify for financing and afford the payments.
The bank or other financing available to you may take many forms, including
a line of credit to meet short-term needs or fixed-rate, fixed-term loans
that can spread equipment acquisition costs over many years.
Even without a specific need, you may want to prearrange enough short-term
credit to cover a substantial percentage of your operating budget for some
weeks, just in case. However, note that many lenders charge continuing fees
for an unused credit line. Regardless of the cost to maintain the line,
having the ability to draw on funds without limitation is crucial to your
practice’s financial flexibility.
Collateral?
Financing terms often require pledging collateral as security. Acceptable
collateral may consist of practice equipment, accounts receivable or a
personal guarantee from you and/or your partners. In some situations,
medical practices can post letters of credit instead of personal guarantees.
Instead of outside financing that requires such guarantees, some physicians
choose to loan personal assets to their practice, backed with a formal loan
agreement. Besides avoiding personal guarantees, internal financing may be
achievable at a lower interest rate than a bank would require.
Shopping Around
With any financing situation, the types of loans and terms that lenders
offer will differ. So, talking to three or more possible financing sources
is desirable. Obtain their proposals and carefully compare fees, interest
rates and all other terms. Remember, continuing to talk to the lenders with
the least desirable terms may result in an attractive counteroffer. Even in
an environment where lenders are making unprecedented demands, good terms
can be obtained if discipline is exercised in the selection process.
If you are considering borrowing, we can help you evaluate terms and your
practice’s financial ability to carry the debt. As an organization, we have
developed strong relationships with multiple providers of funds that can
assist your medical practice if financing is needed. Please contact
Steve
Dobias,
Kathy Rokita
or any other member of our
Health Care Team
at 317-472-2200 or 800-469-7206 to discuss your needs.
Health Care Commentaries is
provided by Somerset’s
Health Care Team
for our clients and other interested persons upon request. Since
technical information is presented in generalized fashion, no final
conclusion on these topics should be made without further review. For
additional information on the issues discussed, please contact a member
of our Health Care Team. This
document is not intended or written to be used, and cannot be used, for
the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
http://healthcare.somersetcpas.com
.jpg)