For many doctors, launching your own medical practice is a lifelong aspiration. But it's no small task.
Although your experience may vary depending on your speciality, securing a strong source of financing is vital to any self-employed physician's success. And that's exactly what the purpose of this guide is — to help busy doctors just like you cut through the noise to make smart, swift decisions.
Sound like something you could use? If so, let's get down to business.
Many medical professionals own a practice or aspire to do so. Those who go into practice for themselves or join a partnership must face the challenges of business owners.
Starting or acquiring an existing practice requires large sums of money upfront. Once you’re a business owner, you often need capital for expansion. You may need cash flow to get through lean periods. Equipment breaks and needs to be repaired or replaced.
These and other business challenges likely require financing. Fortunately for medical professionals, there are a number of avenues geared specifically to their profession and to small businesses in general.
This guide provides an overview of:
- The types of medical practice financing available
- How loans can be used
- The process of getting a medical practice loan
- Lenders that specialize in loaning to medical businesses
- The challenges doctors face and mistakes to avoid
There are a number of financing options for medical practices. Each can be geared to specific needs. Before you start the process, consider the following questions. Understanding your specific needs and goals can help you make better decisions down the road.
- What do you need financing for?
- How much do you estimate you need? (It's better to overestimate than leave yourself short.)
- What can you afford for a monthly repayment amount?
- When do you need the money (in a few weeks or can you wait several months)?
- What’s your credit score?
- Do you have other outstanding loans besides student loan debt?
- Do you have collateral, if necessary, to secure a loan?
Medical professionals looking to start, buy or expand a practice have multiple options:
Traditional lenders that specialize in health care lending
Many national and regional banks have departments that specialize in lending to medical professionals and practices. Some go as far as having staff designated to these professionals, including for lending.
Similar to physician mortgages, physician practice loans are designed for the unique financial circumstances of medical professionals.
The biggest example of this is how student loan debt is considered. Non-physicians with high student loan debt may have trouble qualifying for a business loan due to their high debt-to-income ratio.
But lenders who work with physicians know that student loan debt is an investment in your future. It’s not like consumer debt that offers little to no return. Health care lenders understand that student loan debt will be offset by the income a physician can generate through their practice.
Lenders that specialize in health care also know that physicians haven’t had much chance to save. Therefore, many will grant loans with no money down. If you meet all other qualifications, you can receive 100 percent financing for your business needs.
Banks with physician programs will often be your best option. This is especially true if you’re purchasing or buying into an existing practice with documented cash flow. Traditional banks also offer among the lowest interest rates.
In exchange for offering low rates, traditional lenders will not take on much risk. This makes obtaining traditional financing more challenging than other types of loans. Traditional lenders also have a lengthy application and underwriting process. Though if you obtain financing without working through a government agency, the process will be easier.
If you’ve worked with a lender for a physician mortgage loan, it may be easier to obtain a medical practice loan from the same lender.
Non-traditional, alternative financing
There are also a number of non-bank lenders available. Many of these companies specialize in the health care industry. These companies typically offer short-term loans or lines of credit.
Alternative lenders typically have more relaxed underwriting standards compared with traditional lenders. Alternative lenders emphasize your business potential. Your past credit history is not as important to alternative lenders as it is with traditional banks. You may not need collateral with these lenders.
And they can typically provide funds much quicker, often in two to three days. The application process is much more streamlined. Some alternative lenders enable you to complete the entire process online.
Another positive of alternative lending is repayment flexibility. Some lenders even offer payment plans that fluctuate with your revenue.
The negatives of alternative lenders are higher interest rates, shorter repayment terms, and lower financing amounts available.
Some alternative loans can have APRs as high as 50 percent, which takes into account fees. Whereas traditional lenders can loan you millions, alternative lenders will typically limit you to, say, $500,000.
A popular source for business lending is the U.S. Small Business Administration (SBA). This includes medical businesses.
The SBA partners with lenders to loan money to small businesses. The agency does not make loans. They reduce the risk to lenders by guaranteeing up to 85 percent of the loan amount. This means less risk for a lender in the event a borrower defaults. The agency also makes it easier for lenders to access capital.
Because it is taking much of the risk of business loans, the SBA has established lending guidelines.
Loans guaranteed by the SBA can be as much as $5.5 million. SBA loans can be used for most business purposes, including working capital, and fixed assets like furniture, real estate, machinery, equipment, construction, and remodeling.
The SBA requires collateral as security on most SBA loans. However, the SBA often will accept a loan without collateral if that is the only negative aspect of the loan application.
There are several SBA loan programs. Some of these programs set restrictions on how you can use funds.
SBA loans will typically offer the lowest interest rates compared with other financing options. Additional upsides of SBA loans depend on which program you elect.
The downsides of SBA loans include:
- The length of time it takes to acquire funding. It could take 30 to 120 days from loan approval to close. During that time, there will be multiple follow-ups with underwriters and loan officers. Closing could require the review of 90 or more documents.
- Eligibility requirements. According to SBA, you must have tried to use other financial resources, including personal assets, before applying for a loan. Also, an SBA loan is only an option if you’ve been in practice for at least two years. There is also a minimum credit score requirement of 680.
- Size limits. There is also a limit on the size of a business. This is usually stated in the number of employees or average annual receipts. The definition of “small” varies by industry. For offices of dentists and specialists, the limit is $7.5 million net worth. General physicians are allowed to be worth $11 million. Imaging centers and home health care facilities can qualify with as much as $15 million in net worth.
Two programs most applicable to medical practice loans are the 7(a) Program and the 504 Loan Program.
SBA 7(a) Program
This is the SBA’s primary financing program. The 7(a) Program offers loan amounts up to $5 million for:
- Equipment purchases
- Land purchase
- Construction costs
- Repairing existing capital
- Purchasing or expanding an existing practice
- Refinancing existing debt
- Purchasing machinery, furniture, fixtures, supplies, or materials
Compared with other financing options, you can get greater flexibility with the 7(a) Program. It also offers longer repayment terms and lower downpayments. The program also offers special lending programs for businesses:
- Located in underserved communities
- Operated by individuals who served in the military community
- That are looking to meet their short-term and cyclical working capital needs
This program allows for 100 percent financing for existing practices that are expanding, moving, or renovating.
Depending on the lender, you may qualify for the loan based on the projected income of a new location. Others will only make the loan if your existing practice and your historical cash flow are enough to service the proposed debt.
New or existing buildings can also be financed. Ground-up construction is also possible. You can get financing for a new practice if you can show that you have been operating as a separate entity within another practice.
PRO TIP: One thing to consider on 7(a) loans is the origination fee. It can total up to 4 percent of the loan cost for small loans and up to 8 percent for those above $150,000.
SBA 504 Loan program
Another option for certain projects is SBA’s 504 Loan Program. This program can be used by physicians who need to build a new office, renovate or expand an existing medical or surgical facility. It can also be used to refinance their current facility as part of an expansion.
It provides approved small businesses with long-term, fixed-rate financing to acquire fixed assets for expansion or modernization.
These loans are made available through Certified Development Companies (CDCs). CDCs are nonprofit corporations set up to provide 504 lending. There are more than 260 CDCs in the country.
To qualify for a 504 loan, a business must have:
- Net worth less than $15 million
- Average net income of $5 million or less after federal income taxes for the preceding two years prior to application
There is no limit to the size of projects the program will finance, but the maximum loan amount is typically $5 million.
Generally, the project assets being financed are used as collateral. Personal guarantees from owners may also be required.
Here is how 504 loans are typically structured:
- SBA provides 40 percent of the total project cost.
- A participating lender covers up to 50 percent of the total project cost.
- The borrower contributes 10 percent. Under certain circumstances, a borrower may be required to contribute up to 20 percent of the total project cost.
The major downside of 504 loans is their limited use. The use of proceeds from 504 Loans must be used for fixed assets. Acceptable examples include:
- Purchasing an existing building
- Purchasing land and land improvements
- Construction of new facilities
- Modernizing, renovating, or converting existing facilities
- Purchasing machinery for long-term use
- Refinancing of debt in connection with an expansion of the business through new or renovated facilities or equipment
The 504 Program cannot be used for working capital or inventory, or consolidating or repaying debt. In addition, a business must create or retain one job for every $65,000 guaranteed by the SBA. You may be able to qualify without job creation if your project “meets a community development or public policy goal.”
And compared with the 7(a) program, it is more difficult to obtain 100 percent financing. There is typically a 10 percent minimum downpayment requirement on the part of the borrower.
USDA Business and Industry loans
If you’re looking to start, expand or acquire a practice in a small town or rural area, you may be eligible for a loan from the U.S. Department of Agriculture (USDA).
The agency’s Business and Industry (B&I) loans can be used in towns with a population of less than 50,000.
Much like SBA loans, the B&I program works by USDA guaranteeing loans for businesses. It removes much of the risk for the lender. Depending on the size of the loan, the B&I program will guarantee between 60 to 80 percent of the loan amount.
Eligible uses include but are not limited to:
- Business conversion, enlargement, repair, modernization, or development
- Purchase and development of land
- Equipment purchases
- Debt refinancing when refinancing improves cash flow and creates or saves jobs
- Business and industrial acquisitions when the loan will create or save jobs
The B&I program cannot be used as a line of credit.
Repayment terms can be as long as:
- 30 years for real estate
- 15 years for equipment (or its useful life if less than 15 years)
- 7 years for working capital
There are no balloon payments on B&I loans. Interest-only payments are available in the first three years. Collateral is required.
There is an initial guarantee fee equal to 3 percent of the guaranteed amount. Loans also have an annual renewal fee, currently 0.5 percent of the outstanding principal.
Business line of credit
A business line of credit is not like a standard loan. It’s more like a credit card for business financing.
A lender will approve you for a credit amount. Once approved, you can access the credit line as you need funds, up to the limit. For example, a lender may approve you for a credit line of $100,000. If you need to purchase a $20,000 piece of equipment, you can get those funds right away without having to go through the lending process.
You only pay interest on the amounts you borrow, not the full line of credit. Once you pay back the funds, they’re available to be borrowed again. This is known as a “revolving” line of credit.
Credit lines are available through traditional and alternative lenders.
If your only financing need is for equipment, then a specific equipment financing loan may work best. These are especially useful for large equipment purchases, such as an MRI machine. The equipment is used as collateral. With equipment as collateral, you likely won’t need a downpayment or other collateral.
These types of loans are easier to qualify for than traditional bank loans. You can often receive funds in a matter of days.
The repayment term will typically be whatever the life of the equipment is. Interest rates will range from 8 percent to 30 percent, depending on the lender and the size of the loan.
There are several potential uses for medical practice financing. What you need funds for will influence the type of financing you should seek.
Starting a practice
Starting a medical practice is one of the most complex endeavors a physician can undertake. You will likely need financing to cover start-up costs.
This can seem daunting if you’re already saddled with medical school debt. But think of financing a practice in the same light as your education. It’s an investment in your future.
There will be a number of start-up costs to consider when determining your financing needs. These include:
- Real estate, either an existing facility or new construction
- Attorney, accountant, and consultant fees
- Computers and software
- Office furniture
- Medical supplies
- Working capital to keep the business operating until you generate revenue
- Marketing and advertising, including a logo, website, and other creative work
If you’re starting a practice, your lender may require a business plan. This is a document that shows your projected revenue and expenses. It projects how many patients you expect to have and how you will obtain them. If it’s realistic, it will inform the lender whether you will have enough business to repay a small business loan.
Because of the size of the investment, traditional banks and SBA loans will likely be your best option. They will provide the best rates and repayment terms for starting a practice. Many banks also have in-house consultants who can help you with many aspects of starting and running a business. This helps them minimize the risk of you defaulting on the loan due to poor business practices.
Acquiring or buying into a practice
It may be easier for some physicians to buy all or a share of an existing practice than to start one on their own.
Many lenders will finance the acquisition of an existing practice. This includes a complete buy-out, buying out a share of a practice, or becoming a partner.
Acquisition financing typically covers the contents of the practice. This includes the goodwill, accounts receivable, equipment, patient records, and working capital. Construction financing may be available for remodeling and equipment costs associated with a practice acquisition.
Acquiring a practice is a long-term process. In many cases, the buyout is planned long before the transaction occurs. SBA or traditional bank financing is the typical route for practice acquisition.
Keep in mind that lenders may limit the amount they’ll loan based on the practice’s prior collections. Lenders will also look at whether the buyer can perform the same medical procedures as the seller or existing partners. Any discrepancies can affect the business — and loan approval — going forward.
If you’re an existing practice, you can use a small business loan to consolidate your existing debt. Reasons to consider debt consolidation include:
- Your credit has improved. The terms on your current debt may not be as ideal as what you can get now with better credit. If your credit score is higher than when you originally obtained financing, you may want to consider consolidating loans.
- Your business has improved. You can also get better financing terms if your business is stronger today than it was when you obtained your loans. Often, just being in operation for a certain timeframe gives you access to more financing options.
- You can lower your monthly payments. This is ultimately the main reason to consolidate debt. You want to save money on your payments. This frees up more cash flow for other needs or expenses. If you can’t save money by consolidating debt, it’s probably not worth doing.
- You need to borrow more. You can often consolidate existing debt to make room for additional financing. As you lower your APR and extend your payment terms, you increase your Debt Service Coverage Ratio (DSCR). This is a simple measure of how much cash you have to pay your current debts.
- You need working capital. You can borrow more than the amount on your existing debt to generate working capital. This extra cash can help while you wait for services to be paid for. It can also come in handy if you have equipment that needs repair or replacing. Another use for working capital is to launch a marketing and advertising campaign. A proper campaign can generate a return on investment in terms of new patients.
There are times running a business when your billings are slow to be paid. Patients may be settling their bills with installment payments. Insurance companies sometimes are slow to make payments. You may also experience periods when you see fewer patients.
Your staff salaries, office expenses, and utilities won’t wait for cash to flow into your business. At times, you may need a cash influx to get by until your billings are paid in full.
For cash flow needs, a line of credit might be your best option. If you’re short on cash, you won’t have time to wait through the traditional lending process. You have quick access to a line of credit and you don’t need to borrow the full amount, just what you need. And you’ll only pay interest on what you borrow.
What’s more, a line of credit could allow you to pay your bills, then repay the credit line once patents and insurance companies have paid you. This will minimize your interest expense.
Alternative financing is another option for cash flow. Keep in mind that the sooner you can repay the loan, the less interest your will pay. This is important as alternative lenders typically charge higher interest rates.
If you’re starting a new practice from scratch, equipment will be a major investment. An existing practice may need to replace equipment. Also, there are occasions where new machines can help you expand or offer additional services. This can increase your revenue.
Don’t forget about your IT expenses, such as digital medical records and the security you need to place on those records to comply with HIPAA.
How quickly you need new equipment may dictate the type of loan you apply for. If something critical breaks down and needs immediate replacement, you may not be able to wait for SBA financing.
Don't forget there are also special loans geared specifically for equipment purchases.
Buying real estate
You can use practice loans to buy land or an existing building. You may be ready to relocate to a better location or a bigger office. You may also want to expand to a second (or third) facility.
Another popular use for buying real estate is to go from renting to owning. If a building mortgage payment would be equal to or less than your monthly lease, it may be to your advantage to buy real estate.
If you’re in the market for construction, the SBA has a program that covers 100 percent of construction costs. This applies to existing medical practices looking to construct or renovate a building. You must demonstrate historical cash flow to qualify. The repayment term can be as long as 25 years on this type of loan.
Learn more about investing in real estate.
Rarely should you settle for the first financing offer you receive. If you can obtain a loan at one bank, you should be able to get at least one more. Then you have a choice as to which offers the best rates and terms.
If you’re seeking a loan for a start-up, acquisition, or construction, you may want to obtain five to even 10 offers.
If you prefer one lender that offers a slightly inferior offer, then use the alternative proposal to negotiate better rates and terms from your preferred lender.
Also, look at more than just the interest rate. Consider the loan term, prepayment penalties, and fees. Check to see if there is a prepayment penalty before you sign off. (See business terminology section for more information.)
Because of the size of the investment you’re making in a practice, you need to evaluate a number of lenders.
When you apply for a practice loan, be ready to share a lot of financial details. The more information you can provide, the more confidence a lender will have in you.
If you’re buying into or acquiring a practice, be prepared to provide its complete financial background. Lenders will also want to know your future growth plans.
For all types of medical financing, lenders will ask about your personal financial information.
If you use alternative lenders, you will still need to provide an array of personal, business, and financial information. Alternative lenders differ in the information they request. Some may request a plan for how the money will be used, your credit history, and verification of your income and assets.
Lenders will evaluate your loan application based on a number of factors. These factors determine whether you qualify for financing. They also determine your repayment rate and terms. These factors include:
- Your medical specialty
- Your credit score
- The purpose of the loan
- 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
If you’re buying an existing practice, you will need to provide the following information about the practice:
- Purchase agreement
- Current balance sheet
- Year-to-date profit-and-loss (P&L) statement
- Federal tax returns
- Schedule of inventory, equipment, fixtures, and other assets
Most traditional bank term loans require a monthly payment. Some banks are requiring a more frequent payment schedule. You will want to confirm with your bank the loan terms, payment schedules, and interest rates.
Bank interest rates will vary depending on:
- The index rate they use. Many loans use the U.S. Prime Rate as the baseline for lending rates. Others use Treasury rates. Some may even use the London Inter-Bank Offered Rate (LIBOR). (See the Business loan terminology section for more information on these indexes.)
- The rate margin. Business lenders that use an index rate will set a margin that determines the base rate they charge borrowers. For example, if the index rate is 5 percent and the margin is 3 percent, the borrower will be charged 8 percent interest on their loan.
- The perceived credit risk. As with other types of lending, interest rates for medical practice loans will vary based on the creditworthiness of the borrower. The lower your risk, the lower your rate.
- The term length. Generally, the longer the repayment term, the higher the interest rate.
In general, the average annual percentage rate (APR) on an SBA loan is between 6 percent and 9.5 percent. Alternative lenders, on the other hand, may charge APRs between 30 percent and 50 percent.
Interest rates may be either fixed or variable. A fixed-rate will not change throughout the loan term. This is true regardless of what happens to the index rate being used. Therefore, a good time to get a fixed-rate loan is when interest rates are low.
Variable rates will change based on movements in the index rates. Therefore, the rate you are charged will fluctuate for the life of the loan as the index rate moves up or down.
Both traditional and alternative loans may require closing costs. There is typically an origination fee. This is an upfront fee charged by a lender for processing and committing to a loan. Origination fees are quoted as a percentage of the total loan amount.
SBA loans often carry an origination fee of up to 4 percent of the total loan. An additional SBA guarantee fee of 3 percent to 3.5 percent applies on loans above $150,000. Alternative lenders typically charge origination fees around 5 percent of the total loan.
Even with a favorable lending environment for physicians, they can still be turned down. Here are the most common reasons why medical professionals are rejected for practice financing:
The borrower’s credit history
Loans are granted based on the risk presented by the borrower. The riskier you are perceived, the less likely you are to secure funding.
Most lenders require a minimum credit score. Traditional and SBA lenders will require higher scores than alternative lenders.
Before you apply for a loan, you should check your credit score. Checking your credit score is like getting a physical. It’s a way to understand your overall financial health.
Your credit score informs lenders and other interested parties of your credit risk. It is based on a number of factors, including how much debt you have relative to your income, and whether you’ve paid past debts on time.
Many people assume their credit is fine. Others avoid checking because they know it’s not.
What you don’t want to happen is to get an opportunity to start or buy a practice and have the deal fall through because of bad credit.
Another reason to check is there may be inaccurate information adversely affecting your credit score. A checkup may also reveal identity theft.
If your credit score looks like a bad cholesterol reading, there are ways to improve it. Good credit health comes from lowering your credit card balances, paying your bills on time, and fixing errors on your credit report.
The borrower’s lack of experience
While it’s not impossible for a new physician to get financing, it is more difficult. If there is little history of practicing medicine or running a business, it’s difficult for a lender to assess the candidate’s loan worthiness. In these situations, lenders will err on the side of caution and deny the loan.
You may need to look harder for financing if you have little experience in the profession. Alternative lenders can provide short-term financing to get you started. Just as importantly, you can start to build up a business credit rating.
PRO TIP:If you have experience in the profession but want to start your own practice, the SBA might be an option.
The finances of the practice
Just because you’re an existing practice doesn’t mean you will automatically obtain financing. Lenders, especially banks and SBA lenders, will scrutinize your financials to determine your loan worthiness.
One of the first things lenders will analyze is the business’s cash flow. After all, they want to ensure that enough money is flowing in to not only repay the loan, but also to keep the business afloat. Poor cash flow is often a cause of business failure.
If you consistently have cash flow issues, you should examine your cash management skills. Also, look for ways to obtain payments faster and diligently follow up on amounts that are past due.
Not only do lenders want to see cash flow, but they also want borrowers to be profitable.
Another area underwriters review is your collections. Are they growing or in decline? How large is your practice?
A lack of collateral
Some lenders require you to put up assets to secure the loan. This is in the event you default on the loan. If you don’t have enough to cover the lender’s requirement, you may be turned down. This is especially true if there other negatives on your application, such as your credit score.
Incomplete paperwork or application
Each lender has a different application process. Some forms are quite detailed with a lot of questions. You will have to submit financial documents such as tax returns.
Because of the amount of paperwork and documentation required for some loans, an incomplete application is a common reason for loan denial. Take the extra time to ensure all requirements are met before you submit an application
Here is a rundown of common mistakes to avoid when obtaining financing for your medical practice:
Not getting professional assistance. You wouldn’t expect your patients to prescribe their own treatments. Nor should you assess your own financial needs and ability to repay a medical practice loan. Before you head down the road of getting financing — whatever the reason — you should discuss the ramifications with a financial planner, accountant, or business consultant. Professional money and business experts can help you consider things you can’t on your own. You should also consider working with an attorney, especially if you’re starting or acquiring a medical practice.
Not shopping around. As stated above, you should never evaluate just one lender. This is true for traditional banks, SBA loans, and even alternative lenders. Physicians are highly coveted clients and lenders will compete to obtain your business. By comparing the rates and terms from multiple lenders, you can better ensure you’re getting the optimal loan for your business.
Using the wrong type of financing. As stated above, there are multiple types of business financing. Each has a place in your financing needs. Each situation calls for a different tool. Unfortunately, some physicians rely solely on lines of credit or their own existing bank in all situations.
Using the wrong type of financing may result in paying too much in interest or having a short repayment period. You also want to avoid a lengthy application and underwriting process if your financing needs are more immediate.
Ignoring the term rate. If you just need a short-term loan, you don’t need a 10-year repayment term. Likewise, large loans require longer terms; otherwise, you may have trouble affording your monthly payment. Make sure before you sign the loan that the repayment term is appropriate for the type of financing you need.
Not understanding prepayment penalties. Prepayment is paying off a loan before the term expires. Commercial loans often restrict how soon you can pay the full balance of the loan. Many lenders will penalize borrowers who pay off balances too soon.
Why penalize paying off a loan early? 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. Make sure you 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. They may also 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.
Borrowing to cover operating costs. If you’re borrowing money to cover your day-to-day expenses, it’s a sign something may be wrong with your business. There are times you may need working capital. But consistently borrowing money to cover payroll or other regular expenses signifies a struggling business. Doing so can adversely affect your ability to obtain financing later on.
Not ensuring a return on investment. Businesses can get sucked into buying new equipment or technology without a real benefit to doing so. Physician practices are no exception. If the new records software doesn’t pay for itself in increased efficiency or some other way, it may not be worth borrowing money to pay for. The same goes for the new equipment you’re buying to replace the machine that still works adequately. Will that new diagnostic device generate enough revenue to justify the cost of borrowing the money to pay for it?
Run the numbers to ensure there is a revenue or savings benefit to a capital expense before taking out a large loan. Include the cost of borrowing when doing the math.
Thinking you can’t afford more debt. Don’t assume that your student loan debt and other obligations automatically disqualify you for a business loan. The fact is, lenders are more than willing to work with physicians still carrying large medical school debt. Before you give up on an opportunity, get an accountant to help you run the numbers. If you can still make money after making monthly debt payments, then getting medical practice financing can be an opportunity to grow your practice.
Don’t forget to protect your income with life and disability insurance
Death and disability often happen suddenly and unexpectedly. Some people mistakenly believe that debts are retired or forgiven when a person dies or becomes disabled, but this is rarely the case.
In general, your business debt becomes the responsibility of your estate following your death. Whoever is assigned as the executor of your estate will be in charge of settling your debts.
However, if there is a co-signer on any loan and that person is still alive, he or she now owns the debt and must repay it.
In community property states, all assets and liabilities acquired during a marriage are considered to be owned by both spouses, even if the spouse did not co-own, co-sign, or hold joint account status. This essentially means that in these states, joint ownership is automatically presumed by law.
Your surviving spouse is liable for all debts that occurred during the marriage in community property states, which are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
If you become disabled and can no longer work, your business debts still have to be repaid. This is especially true if your loan required a personal guarantee.
PRO TIP: The best way to protect you and your family from loan default, collection actions, and adverse credit is to insure your income against the risks of death and disability.
Life insurance can provide the funds needed to pay off your debts and obligations if you pass away. If you have partners, you may want to consider a life insurance funded buy-sell agreement. This is a strategy that enables your partners to buy out your share of the business from your estate if you die unexpectedly.
Physician disability insurance can provide the needed income to keep you from falling behind on your mortgage or car payments, racking up more debt, or being forced to find other sources for needed cash.
If you own all or part of a practice, you should also have a business overhead expense (BOE) policy or rider. Whereas regular disability insurance covers individual income, a BOE policy will help cover your monthly business expenses if an injury or illness impacts your ability to work.
If you have a business or medical practice loan, your lender may require this type of insurance coverage. Lenders do not forgive business loans just because an owner is unable to work. But they also need to protect their capital investment and ensure they receive loan repayments if you can’t work.
Last but certainly not least, you'll need medical malpractice insurance. This will protect you, any business partners you may have, and any employees you hire from professional liability.
Much of the following information comes from sbalenders.com. The website focuses on SBA lenders and ranks them by region and industry.
Bank of America
Bank of America is one of the country’s largest banks, with operations in all 50 states, the District of Columbia, the U.S. Virgin Islands, and Puerto Rico.
Bank of America offers 100 percent financing on practice loans up to $5 million. You can use funds to start, expand, or acquire a practice. The bank also makes loans to purchase office space, buy equipment, or consolidate debt.
Working capital is included with certain loan types, such as startup and practice acquisition. BoA also provides business lines of credit and business credit cards to provide short-term working capital needs to established practice owners.
Interest rates and loan terms are based on the type of financing you seek. Recent SBA data shows BoA has loaned an average of $1.1 million to doctors and $413,525 to dentists.
The bank’s Practice Heartbeat services are free when you start or purchase a practice. It includes practice specialists who help you:
- Determine your practice performance-based upon revenue projections
- Deliver a comprehensive evaluation of your practice
- Offer business strategies to help you improve
Read our complete Bank of America practice solutions review.
BBVA Compass Bank
BBVA Compass Bank is based in Birmingham, Alabama. It makes loans in 25 states. Its recent SBA activity shows 38 loans to dental practices with an average amount of $846,358. For doctors, the average loan amount was $254,582. The average interest rates on medical loans were 5.8 percent for dentists and 7.9 percent for doctors.
BBVA Compass Bank offers practice buy-in financing, lines of credit, and commercial real estate loans.
BBVA was named a “National Preferred Lender” by the SBA. It was also recognized as an “SBA Lender of the Year” in 2015.
Citizens Bank is the 13th largest retail bank in the U.S. It operates primarily in 11 states in the New England, Mid-Atlantic, and Midwest regions.
Citizens has options to address short-term working capital needs and long-term financing. It provides up to 100 percent financing options and 10-year terms to health care practices. Options include:
- Term loans
- Debt refinancing
- Line of credit
- Business/equipment flex loans
- Commercial mortgages
- Practice acquisition
Citizens Bank has made recent dental loans averaging just over $394,000 with an average rate of 5.6 percent. Its doctor loans have averaged $97,591 with an average rate of 6 percent.
Fidelity Bank began in 1974 serving the metro Atlanta community and has since grown to serve communities throughout the Southeast. It also offers lending in parts of the Midwest.
Fidelity Bank is an SBA Preferred Lender and offers medical professionals up to 100 percent financing. Financing can be used for start-up practices, expansion and acquisition, commercial real estate, equipment, and working capital. Financing up to $5 million is available. Repayment terms with fixed rates are available for 5, 10, and 25 years.
According to sbalender, dental loans have averaged $755,630 at 6.6 percent. Doctor loans have averaged $967,929 at 6.5 percent.
First-Citizens Bank & Trust Company
First-Citizens is a regional SBA lender based in Raleigh, North Carolina. It provides SBA loans in Arizona, California, Colorado, Florida, Georgia, Maryland, Missouri, New Mexico, North Carolina, Oklahoma, South Carolina, Texas, Virginia, and Washington.
First-Citizens offers loans and financing for medical equipment, real estate loans, physician buy-ins to your practice, and practice acquisitions.
Average amounts on SBA dental loans from First-Citizens are $791,654 with an average rate of 5.6 percent. Doctor loans have averaged $637,800 at 5.7 percent.
Huntington Bancshares Inc.
Founded in 1866 as The Huntington National Bank, Huntington Bancshares operates from the same Columbus, Ohio founding location in the heart of the Midwest.
Huntington has been named the #1 SBA lender in its region for the past nine years. The bank does business mostly in eight states: Illinois, Indiana, Kentucky, Michigan, Ohio, Pennsylvania, West Virginia, and Wisconsin. It offers 7(a) and 504 loans through the SBA. The bank offers term loans, real estate loans, and business lines of credit.
In 2017, Huntington made 22 business loans to doctors average $267,155. It also made 17 dental practice loans averaging $186,141
One of the largest banks in the world, JPMorgan Chase does SBA lending in 31 states.
According to sbalenders.com, JPMorgan made 92 doctor practice loans in 2017, with average financing of $248,926. The average rate charged was 7.1 percent. Dental practice loans averaged $356, 574.
The bank says it has more than 250 banking professionals dedicated to working exclusively within the health care sector.
JPMorgan touts its health care payment optimization methodology. This is “designed to help determine the most efficient payment processing solutions for improving your key payment processes.”
Physicians can receive secured revolving lines of credit and term loans through JPMorgan. The bank says it can accommodate businesses that are new to asset-based lending.
Live Oak Bank
Based in Wilmington, NC, Live Oak Bank has financed over $1 billion in practice loans to dental and medical professionals for acquisition, expansion, construction, commercial real estate, refinance, working capital, and more.
The bank offers:
- A dedicated health care financing team
- 25-year financing options
- Flexible repayment options
- No balloon payments or covenants
Live Oak loaned money to borrowers in 48 states last year. The Average dental practice loan was nearly $1.4 million. Physician practice loans made by Live Oak averaged more than $1.6 million. Both loan types had average interest rates of 5.8 percent.
Read our complete Live Oak Bank practice finance review.
SunTrust lends predominately in the Southeast U.S. Recent doctor loans have averaged $377,613 at a rate of 6.3 percent. Dental practice loans have averaged $239,250 at 6.7 percent.
SunTrust offers physician and dental lending with:
- Fixed pricing for consistent monthly payments
- Fixed rates as low as 7.20 percent APR
- Interest-only payment options
- Repayment terms up to 10 years
- No application or origination fees, no pre-payment penalties, no credit life insurance requirements, and no hidden charges
- Lines of credit between $25,000 and $100,000
Based in Wilmington, Delaware, TD Bank operates mostly along the Atlantic Coast. The company is a preferred SBA lender.
Its medical practice financing options include up to $5 million, 100 percent practice value financing, plus working capital. Additional small business financing options include:
- Loan amounts from $10,000 to $1 million with 3 or 5-year terms (Larger lines available for commercial-sized businesses)
- Lease options available for equipment purchase or refinancing from $5,000 to $1 million
- Commercial real estate loan amounts from $25,000 to $1 million with terms up to 20 years
- Lines of credit for amounts between $25,000 to $500,000 with a variable interest rate. Your line of credit can be paid down and used again, and you may choose to make an interest-only payment
Recent doctor loans have averaged $230,819 at a rate of 7.4 percent. Recent dentist loans have an average of $159,773 at 7.8 percent.
UMB was founded in 1913. It is consistently ranked as one of America’s Best Banks, based on eight financial measures of asset quality, capital adequacy, and profitability, according to studies by Forbes and SNL Financial. It does business primarily in the Midwest and South Central U.S.
UMB has designated specialists for the health care field. The bank offers flexible payment plans, working capital, and up to 100 percent financing for:
- Practice refinance
- Expansion and construction
United Midwest Savings Bank
United Midwest, through United Capital Source, promotes short-term financing options for medical professionals. It offers small business loans for doctors, health care professionals, and medical practices that are awaiting insurance payments and other receivables.
The average dental practice loan is currently $747,704 with an average rate of 6 percent. The bank has loaned an average of $810,726 to doctors at an average rate of 6.7 percent.
United Midwest is based in Ohio.
U.S. Bank did small business SBA loans in 26 states last year. They offer health care financing for acquisition or buy-in, refinancing a practice, expansion or relocation, starting a practice, and equipment financing.
Recent dental practice loans have averaged $325,556 with an average rate of 6.7 percent. Average doctor loans have averaged $406,459 at 7.1 percent.
U.S. Bank offers:
- Up to 100 percent financing available with no downpayment required
- Terms up to 10 years
- Up to six-month interest-only program (contingent upon credit approval)
- 12-month step-up programs
- Ability to offer no prepayment penalty
Read our complete U.S. Bank practice finance review.
Wells Fargo Bank
Wells Fargo is one of the largest banks in the world. It lends money in all 50 states through the SBA program.
In 2017, the bank made 78 loans to physician practices with average financing of $774,331. The average interest rate charged was 6.3 percent. The average dental practice loan by Wells Fargo was $722,596.
Wells Fargo has a dedicated department for health practitioners. It offers 100 percent financing to start, acquire, or expand a medical practice.
For fixed loans, Wells Fargo offers 10-year repayment terms on all loan types.
Its line of credit enables you to borrow up to 20 percent of your prior year’s revenue for inventory purchases, operating expenses, and working capital.
The bank also offers practice support, project oversight, and access to health care business specialists.
Read our complete Wells Fargo practice finance review.
1st Med Financial
1st Med Financial provides 100 percent startup financing programs for licensed medical doctors. Financing includes working capital. Loan amounts from $250,000 to $10 million are available with low fixed-rate terms. Graduated and deferred payment options are available.
1st Med Financial also offers 100 percent financing for basic equipment, furnishings, and supplies. They will also loan money for startup costs, practice acquisition, debt consolidation, practice buy-in, and practice expansion.
American Business Credit
American Business Credit provides unsecured loans and lines of credit. The company promotes a simplified application process and no upfront fees. Unsecured loans are available for up to $150,000. Other loan programs can provide up to $1 million.
American Medical Loans
With American Medical Loans, doctors can borrow up to $300,000. Money can be used to hire staff, to purchase equipment, for practice expansion, to consolidate debt, and to lease office space. Term loans and lines of credit are available.
Initial Lending Group
Initial Lending Group (ILG) makes business loans between $25,000 and $150,000. The lender charges rates based on the prime rate. The range is between 3.5 percent to 6.5 percent above prime. The longest term available is five years. A line of credit is also available. Approvals usually take 48 business hours and funds can be transferred the day after.
National Business Capital
National Business Capital promotes medical practice loans with no minimum revenue, time in business or credit score. Loan amounts between $10,000 and $5 million are available. Repayment terms range from six months to 10 years. The company says it can provide funds within five business days.
National Funding provides quick financing of up to $500,000. The application process can be done in minutes when you provide three months of your practice’s bank statements. Collateral is not required.
OnDeck offers prime borrowers APR rates as low as 6.99 percent. Physicians can get funded in as fast as one day. Loan amounts up to $500,000 are available. Repayment terms between three months and three years are available. Qualification requirements include a 500 credit score, at least 12 months in business, and annual gross revenue of at least $100,000.
US Medical Funding
US Medical Funding (USMF) only specializes in dental, veterinary, medical, ophthalmic, pharmacy, and healthcare centers and services. Loans are available in amounts between $25,000 and $10 million. USMF will finance:
- Starting a practice
- Expanding a practice
- Real estate acquisition
- Refinancing and debt consolidation
- Medical equipment financing and leasing
- Lines of credit and working capital
Below is a list of common terms you may encounter when researching and obtaining practice financing.
- Accounts receivable. This is the money owed to you for services you have already provided. For physicians and dentists, this is typically the money your patients and/or their insurance companies owe you. Because it is money already earned, it is considered an asset by lenders. Accounts receivables can be used as collateral in some cases.
- Amortization. Amortization is the process by which a loan’s principal decreases with each payment. An amortization schedule is a table that shows how much of each payment goes toward reducing the loan’s principal and how much pays interest.
- APR. The loan’s annual percentage rate (APR) is the percentage of the loan amount charged annually. It takes into account the interest charged plus fees and additional costs associated with the loan transaction. It differs from the loan’s interest rate, which does not reflect added fees and costs. The APR is important because it communicates the total cost of borrowing money.
- Asset-based lending. This refers to loans and lines of credit secured by collateral assets. The collateral may be inventory, accounts receivable, equipment, real estate, or other assets on the borrowing company’s balance sheet.
- In asset-based lending, the loan is granted based solely on the borrower’s assets pledged as collateral. The lender does not look at cash flow. The terms and conditions of the loan depend on the value and type of assets being put up as collateral. Typically, the lender will limit the loan amount to a certain percentage of the assets’ market value.
- Balance sheet. This is a financial statement that shows what your practice owns and what it owes (i.e. assets and liabilities). If you have or are looking to buy an existing practice, a lender will want to review your balance sheet to assess its overall value and financial strength.
- Balloon payment. This is a large principal payment that becomes due at the conclusion of the loan term. If you have a 10-year term and your payments won’t pay off the loan in 10 years, your final payment will be a balloon payment. The balloon payment will be considerably larger than your monthly payments.
- Bridge loan. A bridge loan is generally a short-term loan. It is used to bridge current needs with financing that will come later. It may be used until a longer-term loan can be arranged.
- Collateral. Collateral is an asset of value used to secure a loan. When you buy a home, the property itself is the collateral that secures the loan. For business loans, almost any asset the bank can use to cover its losses if you default can be used as collateral. That is provided you or your business own the asset. Examples include real estate, equipment, accounts receivable, and inventory.
- Current assets and liabilities. This refers to short-term assets you own and short-term debts that you owe. Current assets include accounts receivable, securities, inventory, and anything else you can convert to cash within a year. Current assets typically do not include real estate. Current liabilities are those that become due within a year.
- Current ratio. This is a way of measuring the liquidity of a business. For a lender, it measures a borrower’s ability to pay short-term obligations. It's determined by dividing the current assets of a business by its current liabilities.
- Debt service coverage ratio. This is a way lenders measure how much cash flow is available to pay your current business debts. There are two components of this ratio. One is your net operating income. The other is your total debt. Net operating income is your practice’s revenue minus its operating expenses, but not including taxes and interest payments. Your debt is typically measured by what is due within a year.
- A ratio less than 1 means you have more debt than cash flow and would not be able to get additional financing. If your business is only slightly above 1, you may have trouble getting more financing because a loss of cash flow could put you in negative territory. The ratio needed will depend on the business history, the lender, and the current state of the economy.
- Default. This is the failure to repay a loan. If you default on your practice loan, the lender could take possession of any property used to secure the loan, including collateral. Defaulting on a business loan will also greatly hurt your credit score.
- EBITDA. This is an abbreviation for Earnings Before Interest, Taxes, Deprecation, and Amortization. This is a measure lenders use to evaluate a business's creditworthiness and ability to repay a loan. It is calculated by taking the net earnings of the company and then adding back interest costs, taxes, depreciation, and amortization.
- Factor rate. This is a term that typically only applies to short-term loans and cash advances. It’s a way of quantifying financing without using an interest rate or APR. The factor rate is basically the amount you will have to pay back on a short-term loan. It takes into account the financing fee. For example, if you borrow $1,000 and have to pay back $1,200, your factor rate is 1.2.
- Joint-and-several liability. This is a clause used when multiple parties own a business. It’s a clause contained in the loan agreement that all partners are responsible for repaying the debt. Their share of the debt is typically equal to their share of the business. Furthermore, if a partner sells out or becomes insolvent, the other partner(s) become responsible for repaying their share of the debt.
- LIBOR. The London Inter-Bank Offered Rate is an index rate used by some lenders. LIBOR is a benchmark rate used by the world’s leading banks to charge each other for short-term loans. The index is based on five currencies: The U.S. dollar, the euro, the pound sterling, the Japanese yen, and the Swiss franc.
- Lien. A lien is a legal term meaning to guarantee an obligation. When you put up collateral for a practice loan, the creditor places a lien on the property that is securing the loan. Once the loan is repaid in full, the lien is released. If you do not repay the loan, the bank may execute the lien, seize the property, and sell it to repay the loan.
- Line of credit. A line of credit is similar to having a credit card. A lender will give you a maximum amount of financing. Once that is established, you can borrow against the credit line at any time for most business purposes. You only pay interest on the amount you borrow from the credit line, not the full credit line. Repayment terms are also established, much they are for term loans.
- Loan-to-value ratio. This is a measurement of the amount being loaned compared with the overall value of an asset. For example, if you borrowed $80,000 for a piece of property valued at $100,000, your LTV ratio would be 80 percent. LTV ratios are a way for lenders to measure the overall risk of a business loan.
- Net operating income. Income from a business after operating expenses have been deducted, but before deducting income taxes and financing expenses.
- Origination fee. An upfront fee charged by a lender for processing and committing to a loan. Origination fees are quoted as a percentage of the total loan amount.
- Personal guarantee. A personal guarantee is an agreement you sign agreeing to pay back the loan personally if the business cannot pay. Basically, you as the individual co-sign the loan on behalf of your business. This is the case even if your business is a separate entity like a corporation or limited liability company. A personal guarantee is required by many lenders and for many SBA loans.
- Practice valuation. This is the process of determining the economic value of a medical or dental practice. This is used by lenders when determining financing terms for practice loans or lines of credit.
- Prepayment penalty. Some small business loans will include a prepayment penalty. This is an extra fee you will have to pay if you decide to repay the full balance of the loan before the repayment term expires. For example, if your loan repayment is 10 years and you repay it in full in nine years, a loan with a prepayment penalty will charge you an extra fee.
- The reason lenders may charge a prepayment is because they often price loans based on borrowers paying the full amount of interest over the entire term. The fee is typically a percentage of your loan’s balance at the time you finished repaying it. When shopping for business loans, look for those that do not have prepayment penalties. This will give you the flexibility of paying it early without penalty.
- Prime rate. This is a short-term interest rate used by lending institutions as an index or benchmark. It is tied to the Federal Funds Target Rate set by The Federal Reserve. Many loan rates, including some business loans, are tied to the Prime Rate. Lenders will add a margin to the Prime Rate to set their loan rates. For example, say the Prime Rate is 5 percent. The lender wants to make a margin of 3 percent. They will therefore set their lending rate at 8 percent (5% + 3%).
- Principal. This is the amount you borrowed. It’s the amount you have to repay with interest before your loan is satisfied.
- Principal balance. This is the amount remaining on your practice loan. Your payments include interest and other fees, so your balance will not decline at the same rate as your payments.
- Profit and loss statement. This is a financial statement that summarizes the revenues and expenses of a business during a given period. The period measured is typically a quarter or year. If you took in more money than you paid out, you turned a profit. Otherwise, you reported a loss for that period.
- Second position. There may be times when a small business needs two or more loans to finance a project. This is often done through a long-term loan through a traditional bank, followed by short-term financing through alternative lenders. The second position refers to the second, alternative lender. Many lenders don’t want to be in the second position because of the chance of default. If the borrower defaults on both loans, the lender in the second position may not recoup their funds. Typically, the first lender will have the first opportunity to collect. If you need more than one loan, you will have to seek an alternative lender willing to take second position on financing.
- Term loan. This is a business loan that offers a fixed repayment period or term. The interest rate and monthly payment during the term remain unchanged. A typical term for a practice loan is 10 years. Some lenders offer terms as high as 25 years.
- Working capital. This is the cash you need on hand to keep your business operating. Often, you have expenses that can’t wait for revenue to generate. These include your staff salaries, the lease or mortgage on your property, and paying vendors. Medical practices often struggle to have enough working capital because of the time it takes to get paid by patients and insurance companies. You can often obtain financing to have working capital until you get paid for your services.
Jack is the Head of Content Marketing at LeverageRx, a personal finance company that simplifies how healthcare professionals shop for financial products and services. A Creighton University graduate and former advertising creative, he has written extensively about topics in personal finance, work-life, employee benefits, and technology. His work has been featured in MSN, Benzinga, TMCNet, StartupNation, Council for Disability Awareness, and more.