Medical Lending vs Traditional Business Loans

What is Traditional Business Lending?

Traditional business loans are simply general loans offered by financial institutions like national banks and local credit unions. These loans are typically “conforming” loans, meaning they follow a standard set of rules. Although banks each set their own eligibility requirements, they’re generally very similar to one another, and all focus heavily on your business’s past performance and your personal financial profile for credit approval.

Traditional loans tend to have a standard underwriting process that focuses on your credit score and annual revenue. They may have set maximum loan amounts and loan terms, and offer fixed rates that result in consistent monthly payments. You may have to provide a personal guarantee and offer general collateral in the form of a lien on all of your business assets.

Traditional lenders are often reticent to approve medical financing. Healthcare businesses frequently must bill insurance companies and Medicare, which have long repayment cycles. Even if this money is guaranteed, many lenders worry about these payment delays, which factor into credit decisions.

Key Differences Between Medical Lending and Traditional Business Loans

While traditional business loans and medical lending are both financing options available to reduce healthcare entrepreneurs’ out-of-pocket expenses for their business, there are several key differences to understand.

Underwriting and Approval

The biggest difference between the two lies in how your loan application is assessed. In traditional lending, you’re a number in a spreadsheet. In medical lending, you’re a professional with a valuable skill set.

• Traditional underwriting: A general bank will look at your credit score, financial statements, and, perhaps most importantly, your debt-to-income (DTI) ratio. If you’re a new doctor with $300,000 in student loans, a traditional bank might view the debt as a red flag, even if your business could reasonably cash flow $400,000 a year.

• Medical lending underwriting: A medical lending provider will often exclude your student debt from the calculation to focus on your practice health instead. They’re more concerned about your patient volume and payer mix. They may even use AI to analyze your billing data and streamline the approval process to a matter of business days, rather than weeks or months.

Loan Amounts and Repayment Terms

How much you can borrow and how long you have to pay it back is crucially important, especially for new businesses.

• Traditional limits: Most traditional business loans cap out based on your historical revenue. If you’re a startup, you may face hard loan limits and have to accept short-term repayment windows with higher annual percentage rates (APRs). The bank wants to make sure you can make payments immediately.

• Medical lending limits: Because medical lending accounts for growth, limits may be much higher. You can get a general loan to cover a range of medical expenses from hospital beds to real estate, or a substantial loan to acquire a specific piece of medical equipment. Medical lenders understand that the loan will translate to revenue.

Approval Speed

Whether you’re looking to take advantage of a business opportunity or jump on a chance to buy an existing medical practice, speed is of the utmost importance. You’re competing against other business owners and private equity, so it’s crucial to have a medical lending partner that can move fast.

• Traditional lending speed: Traditional business loans tend to require a massive amount of paperwork, even if you prequalify for financing. You may wait several months for a decision.

• Medical lending speed: Medical lenders tend to work faster, especially when speed is important, like when you’re applying for a medical practice acquisition loan. These lenders have teams that specifically analyze medical practice valuations, so they know if a practice is worth the asking price based on the available data.

Collateral and Personal Risk

No one wants to lose their home because their business had a bad month. This is a real risk with traditional business loans. Most banks require a personal guarantee, meaning they can come after your house or savings if the business fails.

Medical lending is often non-recourse or limited-recourse. Lenders feel safer because the medical degree and business equipment act as the primary collateral for the loan. You still have to pay the loan, of course, but your personal assets are better insulated from any potential issues with the business.

Types of Financing Options for a Medical Business

Like any other industry, there are a wide range of financing options available to healthcare businesses. Both traditional banks and specialized medical lenders may offer the following financing products.

Term Loans

These traditional loans are likely what you think of first when you consider financing. With a term loan, you receive a lump sum upfront from a lender, which is then repaid with monthly payments based on an interest rate. Medical lenders may offer more flexible repayment terms, but either way, you will be required to repay the loan within a specific term.

Equipment Financing

Many medical practices require cutting-edge equipment. Both traditional lenders and medical lenders can offer medical equipment financing that is secured by the equipment itself. If you fail to repay the loan, the lender may repossess and sell the equipment to recoup their losses. Essentially, the lender pays the vendor directly, and you pay the loan back over time.

Many medical lending programs offer 100% financing and include tech-refresh options. Since medical gear becomes obsolete quickly, these loans let you trade in your gear for new models after a few years. Traditional business loans are too rigid for this kind of flexibility.

Business Line of Credit

A business line of credit is part credit card, part term loan. It acts as a flexible safety net, giving you access to a pre-approved loan amount, but only requiring you to pay interest on what you use. So, if you have a bad month and need cash to cover payroll, you can draw on a medical practice line of credit to keep the doors open and then repay what you borrowed over time. A line of credit can be an invaluable tool to businesses that are experiencing difficult times or are ready to grow.

Final Thoughts

Choosing between medical lending and traditional business loans may come down to your growth stage. If you’re a small clinic with simple needs, a traditional bank may offer financing options that suit your business. But if you want to scale, buy expensive medical technology, and protect your personal assets, medical lending may be better suited to the unique needs of scaling healthcare businesses.

Specialized lenders understand the industry better. In today’s competitive and ever-changing landscape, having a lending partner who speaks your language is a significant advantage.