By Greg Schultz
I represent a bank that has been providing financial solutions to medical practices for more than 20 years. The two most common situations we encounter with physicians are providing financing for start-up practices and, especially recently, providing financing for break-away practices—physicians who were once part of a health system, but who are now choosing to become independent.
Hospitals that were once acquiring physician practices a couple of years ago have since learned that they cannot operate private physician practices with the same economies of scale that they can a hospital. Therefore, both the hospital and the practice can operate more profitably when the practice is independent. Hospital bankruptcies and ensuing takeovers also have contributed to the recent increase of independent physician practices. Regardless of whether the practice is a start-up or a break-away, banks offer a number of different financing solutions. Often, a revolving Line of Credit that provides short-term flexibility and a long-term payback is the best way to go.
Why a Line of Credit?
A Line of Credit offers physicians in both situations the same advantages, although every “package” varies and is customized to the individual practice’s needs. With a Line of Credit, unlike a traditional loan, physicians only use the money on an as-needed basis. By the same token, they only pay back the monies that were used. The bank typically converts the Line of Credit into a five-to-seven-year term loan at the end of the first year, but works with physicians to gradually ease them into a comfortable repayment schedule. The first year is often interest only. A multiple-year amortization typically follows the interest-only period. We try to arrange a graduated payment program, tailoring payments to the practice’s cash flow. In short, we’re as flexible as necessary to meet the physician’s specific needs.
Break-Away Uses of a Line of Credit
How a Line of Credit is used varies greatly between break-away and start-up practices. For break-away physician practices, little may be changing since before becoming affiliated with the hospital. The patient base and the office location usually remain the same and the only change is the payment flow to the practice. The practice needs the Line of Credit to cover the first two to three months of operating expenses, which typically include implementing a new billing system, securing insurance coverage and obtaining a new tax I.D.
Start-Up Uses of a Line of Credit
The landscape is entirely different for start-up physicians. They may need financing for any one, or all of the following needs: to purchase a building, improve the office space, lease or buy medical equipment and office furniture, purchase computer equipment, meet payroll expenses, etc. Usually 50 to 60 percent of the start-up physician’s Line of Credit is used for first-year working capital to cover costs and overhead.
It should be noted that many banks can provide financing for any of the aforementioned needs in contrast to a medical leasing company that can help only with the equipment. Banks offer the physician a host of additional “one-stop” shopping alternatives as well, for example, business checking accounts tailored for the individual needs of the practice, Merchant Service payment systems that allow patients to pay by credit card, payroll processing and desirable online banking options. As the practice grows, the bank also offers attractive retirement, pension and 401(k) plans. This is all in addition to a full array of consumer products for the physician’s personal financial needs.
Some banks shy away from lending to start-up practices. Often, start-up physicians are burdened by debt such as school loans, they lack tangible collateral and often have a negative net worth. This is not exactly the most desirable situation for a person to be in when approaching a bank for financing.
Some banks, however, look for ways to work with start-up physicians and see a highly motivated, educated person who has been striving toward the goal of becoming a doctor for the better part of his or her life. Therefore, rather than looking at the recent medical school graduate as a potential credit risk, the bank may view the new physician as a person with whom they’d like to do business.
The Qualifying Process
Physicians can assure themselves that they are taking on an appropriate amount of debt by having a strategic financial plan and participating in a thorough qualifying process for a Line of Credit. The qualifying process usually involves a market study of the area where the physician wishes to establish his or her practice. The bank looks at the number of other physicians in the area. How many are within the same specialty as the bank’s prospective customer? Is the area demographically sound? What are the credentials of our prospect? Where did he or she go to medical school? Is he or she Board certified? Board eligible? At what hospitals does he or she have privileges?
Once this information is gathered and approved, the bank then determines the amount of the Line of Credit. The bank uses the assets of the practice as collateral, but these assets often only amount to between 50 to 60 percent of the Line of Credit. The bank also makes sure that the start-up physician purchases enough life and disability insurance to cover the remainder of the loan as well as the repayment. The entire process from applying to being approved usually takes two to four weeks.
Banks may also offer value-added services for physician customers, such as providing advice on how to make their practices profitable, including how to structure rent and mortgage payments, taxes, payroll, expenses, employee benefits and other expenses. Today’s physicians operating their own practices must not only be skilled doctors, but also knowledgeable business people in order to survive in this volatile health care environment.
Greg Schultz is vice president of PNC Bank.