Doctors often need to finance their practice due to the high cost of medical diagnostic equipment and overhead. The medical field enjoys a preferred status when applying for business loans due to their high rate of success. There are five common business loan types discussed below that are most favorable for financing a medical practice.
All industries have unique obstacles. For those in the medical industry, patients can be slow to pay and oftentimes reimbursements from insurance companies or Medicaid are delayed. This creates a cash flow problem for doctor and dentist’s offices even when they need working capital to purchase supplies, pay for utilities, cover employee payroll, and rent or mortgage payments need to be made. Fortunately, there are a variety of loan types that will help medical professionals get around these issues. And what is better for medical professionals is that their income and revenue potential make them a favorite for business lenders to work with.
How Doctors Can Get Business Loans
1. Small Business Administration
The most common type of business loan for most doctors starting out is a Small Business Administration Loan (SBA). There are several types that medical professionals can choose between. It just depends what you want to use the funds to accomplish. There are advantages and disadvantages to each type. Specifically, the SBA 504 & SBA 7(a) provide different options.
If you’re looking for a small business loan to purchase commercial real estate or heavy machinery/equipment for your practice, the SBA 504 loan is the best choice. If purchasing a practice or getting working capital is the goal, the SBA 7A loan is likely the better tool. What makes each of these options unique is that no matter which lender you use, all SBA loans are supported by the federal government. With this support, the risk the lender takes is greatly reduced.
The maximum amount you can borrow for each of these loans is $5,000,000 and your practice has to fall within the size standard to be considered a small business (For physicians, this would be under $11,000,000 in annual revenue). Typically, if you have a good business credit report, that would be enough to qualify. There is at least one SBA office in every state. If you contact them regarding the status of your business, you can get started on a government small business loan that will give you the financing you need.
2. Traditional Lenders
Medical practitioners also have the option of working with traditional institutions like banks to secure a range of financing options. Typically, these are term loans. You borrow a set amount of money and pay it back over a set amount of time with a given interest rate, in equal monthly payments. This type of loan is what most people or borrowers think of when looking for financing. These are the most common types of loans for small businesses.
Several national banks offer loans and financing tailored to medical professionals. Specifically, this tailoring can include up to 100% financing, a dedicated agent that specializes in medical professional loans that works with you during each part of the financing process or you may have access to preferred interest rates if you are already an ADA member. Bank of America, Wells Fargo and Bank of the West are all traditional lending institutions that provide several options for medical professionals. These banks are able to take into account the unique financial attributes medical professionals have.
While this may seem like an inexpensive option for doctors, banks like these also take into account personal credit and credit history. Even more so than a lot of small businesses, personal credit carries a lot of weight with traditional lenders for the professional industries like medicine or law. While any type of loan can be difficult to get, you should definitely look at this as a viable option. Anytime something is designed specifically for your business sector, it’s always worth considering it.
3. Non-Traditional Lenders
A non-traditional lender is a loan provider that can offer the same level of service as traditional lenders but are often able to have a faster, more seamless process. Non-traditional lenders can be financial, mortgage, or online lenders. Some lenders provide small amounts of cash relatively quickly, while others may loan out large sums that take longer to be approved.
Non-traditional lenders that provide large sums of money may or may not require more documentation than traditional lenders. They may ask for extensive business and personal financial statements, as well as credit reports and business plans. However, if you choose an online lender you can very often skip past all the mind-numbing work of filling out forms since their systems allow you to connect directly with your bank account or other financial institution.
The interest rates vary when working with these types of loans and it also depends on whether the loan is secured or unsecured. Secured loans typically have lower interest rates. The reason why is that they minimize a lender’s risk by putting up a piece of collateral, like real estate, as a guarantee that the loan will be repaid. Non-traditional lenders will also look at an applicant’s credit score to determine the interest rate. The better the credit score, the better the interest rate an individual can obtain. The time period to repay a non-traditional loan also depends on the amount of the loan that is financed.
4. Business Line of Credit
A different type of financing that can be attractive to medical professionals would be the concept of applying for a business line of credit. This is a different type of financing than the previous types discussed, but it can still be an attractive option. It works a little differently than the rest of the medical practice loans already mentioned in this article. A line of credit gets you a set amount of capital you can withdraw, up to a certain limit. You can use that money just like how you would use a credit card, so you only pay interest on what you actually borrow or spend. A positive side to this option is that once you pay back what you borrow, you have access to draw on the full credit line again. Let’s say you get a line of credit for $50,000 and only use $15,000 of it. Once you pay back the full amount owed on that $15,000 principal to replenish the funds, you have access to the full $50,000 again.
5. Equipment Financing
A fifth way to finance would be if you are specifically looking to buy necessary equipment for your practice. If you are, then equipment financing may be for you. As with all types of medical practice financing, there are strengths and weaknesses to equipment financing. In this case, you don’t have to impact your cash-flow as the equipment you buy can serve as collateral.
For example, in opening a small practice, 5 state-of-the art exam tables could cost as much as $40,000 and the necessary lab equipment could cost as much as an additional $25,000 to $30,000. With this option you can keep or open a practice that is state-of-the-art through a simplified application process. It also allows you to look at new equipment that has a longer lifespan than used equipment purchases would have. And, since many pieces of medical equipment are high value items, the risk is lower for the lender. One caveat would be that you always have to be careful in the selection of lenders and the terms you get as some pieces of equipment could end up being obsolete before the terms of the loan are done. Equipment financing is also different in that there may be unfavorable tax consequences due to what kind of interest payments you can or can’t deduct on taxes.
Whether it is improving your practice, buying into a practice or setting up your own office, there are a variety of ways medical professionals can finance their business goals. With any type of financing, the key is to understand each type of loan you are considering to see which one is the best for what you need the money for. Your choice will of course depend not only on what your needs are, but on your current financial situation. There is no single best source for financing your medical practice – only a best source of financing for what you want to do today to help your medical practice succeed in the future.