1. Medical Practice Loans

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Understanding practice finance loans.

What types of practice loans are available to borrowers?

Traditional bank loans

The first place many business owners seek financing is through a national, regional or community bank. Banks offer both term loans and lines of credit to medical professionals. Several national banks have programs designed specifically for health care businesses. Depending on the purpose for the loan, you may be able to borrow as much as $5 million.

Traditional banks that have physician programs are usually the best option if you’re purchasing or buying into an existing practice that has documented cash flow.

Advantages of traditional bank loans. A traditional bank will offer competitive interest rates and terms. Larger banks may also provide consultants and other resources to help business owners improve their chances of success.

Disadvantages of traditional bank loans. Traditional financial institutions are the most discerning. There’s a significant amount of paperwork involved, and there’s no guarantee that after going through the arduous application process that you will be accepted for financing. Unless a bank offers a physician loan program with 100 percent financing, you will need to provide a significant downpayment to obtain financing.

SBA loans

The Small Business Administration (SBA) has several federal government-backed programs, such as the 7(a) loan program, designed specifically to help small businesses. This is an option for long-term financing, especially if you’re denied by a traditional lender. If you’re starting a practice from the ground up, an SBA lender may be your best option.

Advantages of SBA loans. This type of financing will typically offer the lowest monthly payment. Repayment terms of up to 10 years are available and SBA loans typically charge among the lowest interest rates. You can also obtain funding if you have limited collateral. SBA loans are also the best option if you need significant financing, as you may be able to get up to $5 million.

Disadvantages of SBA loans. There is a considerable amount of paperwork and bureaucracy when applying for SBA financing, and it often takes two to three months to get funding. There is also more extensive underwriting requirements.

Alternative loans

To meet the needs of health care businesses in need of faster financing without the underwriting process, several alternative lenders have recently been established. You may see these companies referred to as merchant cash advance providers, bridge lenders, gap lenders, or “fast-app” lenders.

These companies market themselves on fast loan approval, less restrictive qualifications, the ability to use funds for nearly any business purpose, and flexible repayment options. Depending on the lender, you can obtain financing between $5,000 to $500,000.

These lenders may be a viable option for short-term needs such as cash flow management, equipment replacement, or funding a marketing campaign.

Advantages of alternative loans. The major advantage of these lenders is that they will approve loans and distribute funds within a day or two. This makes them ideal for an unforeseen expenses or other short-term financing needs. Underwriting is not as arduous as for traditional and SBA lenders.

Disadvantages of alternative loans. Because they don’t do full underwriting, alternative lenders take on more risk. That means higher interest rates and shorter repayment terms, which mean higher monthly payments. Alternative lenders do not offer the size of loans that traditional banks and SBA lenders do.

What criteria do lenders look at when making a loan?

Lenders will evaluate your loan application based on a number of factors to determine your repayment rate and terms, including:

  • Your medical specialty
  • Your credit score
  • The purpose of the loan (use of funds)
  • The historical financial performance of an existing practice or the projected financial performance for a new practice
  • Assets that you may be required to use as collateral for the loan

Among the documentation you may have to provide, especially to a traditional lender, include:

  • Information, including resumes, on all owners with at least 20 percent stakes
  • Current balance sheet and profit-and-loss statement
  • Projected financials for the next one to three years
  • Business and medical licenses
  • Business history
  • Any current leases
  • Personal and business tax returns for the previous two years

What is the cost of getting a practice loan?

Many medical practice loans require an upfront origination fee. The fee is typically a percentage of the total loan amount. So, if you borrow $100,000 from a lender charging a 3 percent origination, you will have to pay $3,000 at closing.

If you borrow for the purchase or construction of your clinic’s office, you can expect many of the same fees as if you were buying or building a home, including:

  • Appraisal

  • Legal fees

  • Loan application

  • Loan origination fees

  • Survey fees

Understanding practice loan prepayment restrictions

Commercial loans often restrict how soon you can pay the full balance of the loan. Prepayment is paying off a loan before the term expires, and many lenders will penalize borrowers who pay off balances too soon.

It may seem strange that a bank would penalize early payment. But commercial lenders often price their loans based on borrowers paying the full amount of interest over the entire term. Therefore, prepayment actually cuts into their profit because the borrower is paying less in total interest.

To either discourage prepayment or to recoup the loss of interest income, lenders may assess a prepayment penalty or fee.

Prepayment terms should be included in the loan documents and you should understand the penalties involved before signing the agreement. You may be able to negotiate prepayment terms as you would other loan provisions.

Lenders with prepayment penalties often assess a percentage of the original loan amount or base the fee on how early the loan is paid in full. Others may include an interest guarantee that entitles the lender to a specified amount of interest regardless of when the loan is paid in full. If the borrower pays the loan early, the interest guarantee would require the borrower to make up the difference.

Some lenders go as far as instituting a lockout. This prevents the borrower from completely repaying the loan before a specified period. For example, if a lender imposes a five-year lockout, the borrower would not be able to repay the loan in full before five years.

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