A pharmacy business requires specialized financing to start and sustain the practice, often requiring a combination of working capital, lines of credit, and commercial real estate loans to pharmacists.
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Independent pharmacies have weathered - and continue to weather - so many changes. Changes to insurance coverage, government regulation, chain store and online competition, and customer demographics, to name a few. Getting a business loan for a pharmacy can be an added challenge, but fortunately there are programs specifically designed for financing pharmacies.
U.S. Pharmacy and Drug Store Industry
With growth in both the aging population and the incidence of chronic diseases, the need for safe, legal pharmaceutical drugs has exploded in the last 3 decades.
Both pharmacies and drug stores dispense prescription medications and over-the-counter drugs directly to patients. However, pharmacies have the more complex and varied function of simple distribution as they dispense medication in specific doses, adhere to mandated modes and conditions of storage, and give valuable advice to patients.
Pharmacies practice in a wide range of locations, such as communities, hospitals, clinics, and nursing homes. Other drug retail outlets include supermarkets, independent pharmacies, and online pharmacies; online pharmacies prove especially convenient for those who may be unable to leave their homes. Typically, miscellaneous products like cosmetics and confectionaries also account for a percentage of sales for these retail outlets.
As they do with other health-related professions, lenders recognize pharmacists as high-success vocation, and therefore good credit risks. However, obtaining a pharmacy loan requires understanding the pitfalls and operational obstacles of the pharmacy business.
Pharmacy Financing - Background and Present Conditions
The chart below shows prescription drug expenditures in the United States from 1960 to 2018. In 2000, this number came to some 121 billion U.S. dollars. Projecting through 2019, it is expected to increase to over 338 billion dollars.
When most people think of a pharmacist, they think of a familiar face they can rely upon to give advice for over-the-counter remedies and guidance on how to administer prescriptions. Who can forget Mr. Gower, the pharmacist in the 1947 Frank Capra film It's a Wonderful Life? The pharmacy business today is almost unrecognizable from that iconic business model . . . and it's now a lot more complex.
Independent pharmacies dispensed approximately 1.5 billion prescriptions annually, accounting for nearly 40% of the retail prescriptions. The average independent pharmacy had total sales of approximately $4 million and average prescription sales of approximately $3.7 million per location (accounting for 92.5% of all independent pharmacy sales). Over 26% of independent pharmacy owners have ownership in two or more pharmacies. The average independent community pharmacy location dispensed 64,169 prescriptions (205 per day) in 2010, up from 61,071 in 2005.
- 2011 NCPA-Pfizer Digest Executive Summary, Independent Pharmacy Today, Gallup
Pharmacists still enjoy Americans' trust and admiration:
Bigger is Not Always Better
For decades, pharmacists collected co-pay amounts from customers, then submitted reimbursement requests to insurance carriers. While insurance companies were notoriously slow, pharmacists knew they would get paid eventually. However, in response to the Affordable Care Act, drug companies spiked product costs and insurance companies began to slash reimbursement amounts for many popular drugs. This has put many pharmacists in the position of needing to fill the gap between what insurance pays and what drugs cost.
Business Insider reports that when Wellmark Blue Cross Blue Shield cut reimbursements by 50% one Iowa City independent pharmacy lost thousands of dollars. Wellmark Blue Cross Blue Shield was the largest insurer in the state. it caused extreme hardship for community pharmacists. The pharmacist wrote the carrier's CEO, asking him to reconsider, given that his pharmacy was treating sick patients more economically than surrounding pharmacies. The CEO of the insurance carrier did indeed re-evaluate its drug reimbursement policy for independent pharmacies. By both parties working together, the carrier was able to amend the reimbursement rates for community pharmacists while lowering overall healthcare costs for their insured customers.
These are among a handful of recent developments showing how independent pharmacists are able to deliver a higher quality of service that not only improves better outcomes for patients, but also boosts the bottom line for insurers. This type of partnership sets a precedent for community pharmacists and offers another indication of the industry's staying power and longevity. It's also another reason that pharmacists enjoy favorable financing when applying for pharmacy loans.
In addition to chain store brick and mortar competition, independent pharmacists also face intense competition from ecommerce businesses like Amazon and Wal-Mart. So that means independent pharmacists are facing competition from two Fortune 500s that are also two of the biggest marketers in the world.
You would think with competition like that, nobody would have the courage to enter this marketplace, and certainly not want to apply for a pharmacy loan, right ? On the contrary, family-owned and independent pharmacies have learned to survive and thrive among the giants that threaten to crush them.
The Human Touch - Independent Pharmacists
In many areas, large national and regional chain pharmacies may try to replace the corner drug store. But they can't replace human touch.
One of the most enduring qualities of a community pharmacist is their accessibility as healthcare providers - patients can come in either with or without an appointment. It's no wonder that independent pharmacists have endured the onslaught of chain pharmacies and corporate consolidation. It is this unique quality that ensures independent pharmacies are here to stay for the foreseeable future.
The pharmacist is responsible for:
- reviewing and interpreting physician orders
- preparing medications
- noting contraindications and advising different courses of action when therapies are contraindicated
- compounding, packaging, labeling, and dispensing medications
- monitoring patients' medication therapies
Not only are these skills technical requirements, they comprise a patient safety net. Often, customers have come to rely upon their pharmacists as much as their physicians.
According to the National Community Pharmacist Association (NCPA) there are over 22,000 independent pharmacies in the United States, employing over 250,000 people. Approximately 26% of pharmacy owners own 2 or more pharmacy store locations, a testament to the health of the industry despite the encroachment of the national chain stores.
Looking more closely at the evolution of the community pharmacy, it is the integration into the community that has supported the independent pharmacist through unimaginable odds against the corporate competition. According the NCPA Digest, independent pharmacies donate over $4,000 to approximately 10 local community groups each year. Many independent pharmacists know their customers by name, and know their families and medical histories, too. It's tough to replace that type of personal service.
Financing the Independent Pharmacy - Innovative New Revenue Sources
The modern pharmacist goes far beyond just dispensing pills. Today's pharmacist is a full-service health service specialty provider.
Three major trends converging:
- An aging population (Baby Boomers becoming senior citizens by the tens of millions each year)
- Advances in medical research and treatment
- Continuation of specialized medical treatments
The result of the convergence of these trends has been the growth and frequency of drugs prescribed to elderly patients, plus an entirely new need to coordinate medical drug therapy and administration.
Some new services being administered by independent pharmacists include:
Post hospital discharge drug/prescription management
Medication administration for patients after they're discharged from a hospital or while getting care at an outpatient medical facility.
Delivery service and prescription management
Another layer of personal touch and community integration, while serving populations with limited mobility.
Sales and Assistance With Durable Medical Equipment (DME)
Helping tens of millions access wheelchairs, electric beds, walkers, canes, and other equipment that provides medical benefit.
Medication Therapy Management
Teaching people about their health conditions and the medications they use to manage them, thereby enhancing outcomes.
Boosting public health by preventing illness and containing outbreaks; pharmacists are approved to administer vaccinations in all 50 states.
Medicare Plan Comparisons
Offering guidance to senior citizens about Medicare plans.
Counseling quitters with over-the-counter nicotine replacement products, advice, and continuous support.
Educating patients about types of medication and how to use them, as well as providing referrals to physicians for more involved medical care.
Pharmacy Finance Tips
PBA Health, a leading pharmacy services organization dedicated to independent community pharmacies, outlined 5 Accounting Mistakes for Pharmacists to Avoid, which include:
- Not knowing the state of your finances
- Not having a formal accounting system in place
- Failing to keep track of expenses
- Not staying on top of receivables and reimbursements
- Not hiring an accounting professional
Financing your pharmacy practice is becoming more important than ever as the role of the community pharmacy evolves with changing demographics and technology. Despite the seemingly inevitable demise of the independent pharmacist, recent developments show that there is a resurgence in the value of this group, with a profound impact on patient outcomes and quality of healthcare. Today's pharmacists need to understand the opportunities and properly finance their pharmacies to meet the challenges of this ever-evolving industry.
Health professionals, including pharmacists, face financial needs just like other business owners. Pharmacies in particular often face cash flow issues because of slow-paying insurance companies and disputed reimbursements. Pharmacists also have to consider the high costs of digitizing medical records, ever-increasing insurance rates, rising rents and the other costs of running a pharmacy.
Typical Loans for Pharmacies
Small Business Administration (SBA) Loans
SBA loans are known across many industries as the most desirable loan type. They offer the most favorable rates and terms for borrowers seeking term loan financing. The SBA is not a direct lender; rathe,r it partners with qualified lenders and provides guarantees against borrower default to those lenders. The SBA can guarantee up to 85% of a loan, allowing the bank or other lender to offer the borrower higher loan amounts on more favorable terms.
SBA loans are notoriously difficult to qualify for and require that the borrower submit a lot of extra paperwork. However, considering the low risk associated with offering business loans for pharmacists, the SBA loan program is an ideal option for financing your pharmacy business.
When seeking a loan for a pharmacy, you will want to pay particularly close attention to the SBA 7(a) program. This program has features that align well with the needs of the pharmacy professional, including its maximum loan amounts, repayment horizons, interest rates, and flexibility in the use of funds.
What to expect:
Loan Amounts: $5,000 to $5 million
Repayment Term: 5 to 25 years
Interest Rates: Starting at 6.75%
Time for Approval: Approximately 6 weeks
Traditional Bank Loans
Traditional banks are still the leading source of small business loans. Most businesses will find that they are able to secure some level of funding through the bank where they already conduct their banking.
In particular, the larger national banks usually have loan programs especially designed for pharmacy professionals. Once again, the high success rate of pharmacies and drug stores makes loans for pharmacists an attractive proposition for banks; they generally will offer favorable rates for financing a pharmacy practice.
Bank terms are not generally as favorable as SBA-backed loans, but here is what you may expect from a bank loan:
Loan Amounts: $30,000 to $5 million
Repayment Term: Up to 10 years
Interest Rates: Starting at 7%
Time for Approval: average 4 weeks
Non-bank lenders such as Biz2Credit, Kabbage, and OnDeck provide business loans for pharmacists on an accelerated approval basis. These lenders tend to have shorter approval cycles, lower credit standards, and less paperwork than the sources mentioned above.
However, pharmacists should expect that there will likely be higher interest rates and fees associated with the convenience of quicker approvals and lower credit standards. If you require a quick solution to your pharmacy financing needs, an alternative lender or non-bank source may be the right solution. Always be aware that non-bank lenders are not subject to the same regulations as banks; you should always read your loan documentation carefully before agreeing to the terms.
What to expect from non-bank lenders:
Loan Amounts: $2,500 to $250,000
Repayment Term: Three to 18 months
Interest Rates: Starting at 10%
Time for Approval: As fast as one business day
Business Line of Credit
A business line of credit is ready cash that you may draw upon up to a pre-set limit. Think of it as a hybrid between a business loan and a business credit card. Like a business loan, an unsecured line of credit provides financing that you can use for general business expenses. Like a credit card, there is no lump-sum disbursement; you borrow only what you need, and pay interest only on what you borrow; payments are revolving. You can get a business line of credit through banks or alternative lenders.
A business line of credit can be an expensive proposition for marginal credit risk. However, if you have a strong credit profile you can negotiate rates and terms. The best advice is to shop around, rates can fluctuate greatly.
Loan Amounts: $10,000 to $1 million
Repayment Term: Six months to 5 years
Interest Rates: 7% to 25%
Time for Approval: As fast as one business day