Every financial institution has its own products and services that it is prepared to offer practitioners. The ultimate decision of defining and starting your practice is up to you. With an organized business plan, a good banker, patience and a realistic outlook, you will become part of the economy.
The first three operating years of any practice are the critical. Approximately 50% of all businesses will fail during this period. Odds of survival are greatly increased by developing and implementing a thorough business plan. All practices, no matter the size, will need financial assistance. Therefore, going to the bank is an exercise that every practitioner must go through and one that you have already experienced several times as a student.
The number one reason practices fail is not due to the lack of patients but poor management of cash flow. Preparing an accurate cash flow forecast and using it will help you stay in control of your practice through both difficult and smooth periods.
Your loan request is really a financing proposal. It should contain financial and non-financial data, indicating the amount of money you wish to borrow and the details of your loan payment plan.
You will also be required to complete a standard loan application.
Tips on presenting the proposal:
- Make an appointment – never drop in unexpectedly
- During the appointment, introduce your purpose for the meeting
- Present your business plan and supporting documents in an organized fashion
- Make sure you remain calm when asked questions, and that you know the answers
- Prior to going into the meeting, it would be prudent to know your collateral options (i.e. if your parents or spouse will guarantee your loan, etc.)
Bankers need to know that your financing proposal represents a safe and profitable investment. If your business plan clearly demonstrates the ability to generate sufficient profits to repay a loan, the banker will feel more comfortable in offering you a loan.
Usually equipment and leasehold improvement loans are secured by a general security agreement. Your operating line is secured by what are called Assignment of Book debts. This refers to money generated by patients and insurance companies. In some cases, personal property is considered, such as a home or stocks/bonds, and third-party guarantors may be required. These would be guarantees from parents, your spouse etc.
The Good, the Banks and the Ugly
Banks are in the business of providing low-risk debt financing. Many people mistakenly believe that the banks should be prepared to finance all proposed business applications. In order to be successful with your financing application, you need to show the bank that, besides being an honest and hardworking individual, you also have a realistic business plan and that you can demonstrate the ability to repay the loan you are asking for. In essence, you need to convince the bank, with more than words, that your proposal is a sound investment. To do this, you need to produce a cash flow forecast.
Of all the supporting documentation in a business plan, the cash flow projections document is probably the most difficult one to prepare. These projections show the anticipated cash flow during the period covered by your business plan. In other words, they show when billings will actually come into the practice. More specifically, it outlines daily operating costs, affordable inventory items and when you can purchase these items. Projected operating costs and profits should realistically estimate how many patients will visit and pay for their treatment each day.
You and the banker will negotiate the terms and conditions of your loan. These arrangements will depend on the following criteria:
- bank’s assessment of you
- your personal debt load
- your personal credit history
- his/her knowledge of the industry
- your practice
- the amount of the loan
- the reason you wish to borrow the money
- payment terms
- current interest rates
- economic conditions
Your repayment proposal should be based on your cash flow projections and the nature of the loan. In general, leasehold improvements can be financed for up to one year less the length of the lease. So, for example, if you have signed a lease for five years, the bank will expect repayment in four years. In the case of equipment loans, repayment can take anywhere from four to seven years, depending upon the nature of the equipment and the amount.
When you complete your presentation to the bank, ask when you can expect to receive an answer. Usually, a banker can give you an opinion within a couple of days. If you have all the documentation required, it is not unreasonable to have approval within three to five business days. Do not take for granted that the bank will automatically finance your loan request simply because you are a doctor.
Prior to formally approving the loan, expect to have a couple of conversations with the banker. After your initial meeting, there may be some questions that come up. The banker will then scrutinize your character, your business plan, your cash flow projections, your ability to repay a loan and the collateral being considered. In the event that your loan is not approved, make sure you ask why.
Once you have been approved, the appropriate paperwork must be completed and signed by you, the banker, and any other involved parties. Expect this process to take a couple of days before the account is formally opened and money is made available to you.
Essential to the success of your practice is the relationship you develop with your banker, suppliers, associates and employees. Communicating on an ongoing basis is vital.
It is also worth repeating that the majority of practice failures are related to poor management. Maintaining a realistic cash flow forecast is an excellent business tracking tool, because it will alert you to any unforeseen problems. When complete, it is also useful for financing requests.
Always be frank with your banker, when discussing cash flow. Choose your words wisely, though, and be careful not to confuse your personal frustration over patient numbers with your ability to generate sufficient cash flow to repay debt. (It’s easy to get down on yourself if your personal goal is to see 200 people/week and you are not, but you may not require that number to meet your basic financial obligations to the bank.) Expressing this frustration to the banker in terms such as, “business is not as good as I expected,” you will likely invite some unnecessary and unwanted concern.
On the other hand, if you run into a cash flow problem and cannot meet a payment or pay an invoice, take the initiative: call and make appropriate arrangements with the banker.
The key to running a healthy practice is being able to make tough decisions on a timely basis. Failure to make decisions promptly and take appropriate action could threaten everything.