How I See Your Medical Practice November 16, 2016 Sponsored Post Mechanics Bank 0 How I See Your Medical Practice by Chris Angle, Assistant Vice President, Commercial Banking As a business banker, we often come across medical practices desiring loans. Some of you are looking for lines of credit to bridge the funding gap between when service is performed and when you get reimbursed by an insurance company. Others are looking to finance some new equipment. And still others of you are looking to purchase a practice, either to expand your existing one or to begin your career just out of medical school. You go to your local bank to request a loan, and the answer often comes back: DENIED! You call the bank and someone on the other end of the phone says that your loan was declined because of “insert the canned decline reason here”; an answer that seems to hide more than it reveals. In the next few paragraphs, I will reveal what your practice looks like through a banker’s eyes, what he/she likes to see, and give you some added insight into the mind of a banker for the next time you approach your bank for funding. When you send an application into a bank, the only question on the banker’s mind is this: How is the bank going to get paid back? For business loans (i.e. ones that don’t have real estate as collateral), a banker will typically like to see three sources of repayment. In most practices, these are as follows: 1.) Cash Flow/Profits of the practice. 2.) Collateral (assets of the business, including equipment). 3.) A personal guarantee from you, the doctor. When a loan is declined, usually there is a deficiency in one or more of these. If you think that you have all of these, but your loan was still declined it could be one of the following issues: Cash Flow/Profits are not as strong as they appear. Your practice seems to be going strong. You don’t have a moment to breathe. The profit at the end of the year has never been stronger, and yet the practice bank account seems a little light. The insurance companies are taking longer to process your claims. You might even have a significant fraction of your receivables over 120 days past due. This factor is reducing the amount of cash that you should be receiving for the amount of work that you have performed. In analyzing your loan request, banks don’t just look at the profit line on the income statement. They look at cash flow into the business. If you are not collecting your receivables in a timely manner, the bank sees a business with declining cash flow, which could make them hesitant to extend credit. The collateral, if sold, will not generate a sufficient amount of money to repay the loan. That machine that you use to perform your surgery might be worth a lot, but your banker usually doesn’t know that. Many banks will give you very little credit for your business assets apart from your receivables, and even then they might heavily discount them. Unless your bank has a department that specializes in medical equipment, they are probably just going to do a “back of the envelope” estimate. Even that estimate will likely be discounted to account for the fact that the bank may have to sell the asset at “fire-sale” prices. In the end, the bank is likely valuing your practice assets at a reduced value. Because some banks look at loans not secured by real estate as unsecured loans, your banker may be looking at your practice’s assets as something that will help him lose less money in a default scenario, rather than something that could repay the entire loan. You are not as financially strong as you think you are. You have cash. You own stocks. You own real estate. You even have an exotic car collection. You have added up all of your assets and liabilities and have a net worth of $10 million dollars. Who wouldn’t lend money to you? In the banker world, there is actual net worth, and then there is net worth he/she can use. While you may actually be worth every penny that you think you are, some items on your personal financial statement may not be worth as much to the bank. For example, imagine that your Microsoft stock is in a retirement account. A dirty little secret is that creditors typically won’t be able to touch that, even if you declare bankruptcy. Some banks won’t give you any credit for retirement accounts in figuring your personal net worth. Perhaps your primary asset (apart from your home) is the value that you think your practice will sell for. The value of your practice and any shares of businesses (other than real estate holdings) will probably be discounted to zero. The upshot is that when your loan request is presented to the person who ultimately decides, that $10 million dollar net worth of yours might be substantially reduced. In conclusion, banks need to make loans to survive. Most medical practices are generally good credit risks, but sometimes bankers look at things a little differently, which can lead to results that were not anticipated. Looking at your practice like a banker, you may be able to anticipate some concerns he/she might have, and work to resolve them. The next time you approach your bank for a loan, you just may get a more positive response. This article is for informational purposes only. This is not an offer of credit, nor a solicitation for credit products or financial services from Mechanics Bank. Mechanics Bank is an equal housing lender. Comments are closed.
