Chad Pfeif 

Editor’s Note: This is the second in a twoâpart series on how medical practices can secure bank financing.

Medical practices seeking a loan need to view banks as partners working toward the same goal. That means working together to prevent medical practices from overextending themselves and risking financial problems that could result in defaulting on the loan.

When it comes time to find a bank, medical practices should approach banks that have experience serving medical practices and share a vested interest in seeing their community - by way of local clients - grow and prosper.

These banks appreciate that successful medical practices, whether solo practitioners or multiâphysician offices, view their practices as businesses. Experienced medical practice owners and/or their tax and legal consultants are quite astute in securing their assets, limiting their liabilities, reducing their taxes, and protecting cash flow.

How to choose a bank for a line of credit

An accountant or attorney advising a solo practice with no real estate or costly equipment needs may still recommend that it create a limited liability company (LLC) to best serve patients while protecting personal assets. A newer or recently acquired practice may elect to do the same. 

Larger practices may consider creating, if they haven’t already, separate business entities for physician owners and potentially other partners. One entity may serve patients, another would own office real estate, and perhaps another purchases and operates specialized equipment that requires a significant investment. Bank loans may then be structured to fund the needs of specific entities.       

Banks understand that practices most often borrow funds to expand and enhance patient service that, in turn, bolsters their financial situation. That may mean practices purchase newer or additional equipment to provide better or broader patient service, thereby attracting more patients. Practices may also wish to expand operations to other neighborhoods or communities. This could mean offering additional or ancillary services that could require more real estate, equipment, and staff.

These activities provide practices with opportunities to enhance income. However, these approaches tend to take time to truly impact the bottom line. Banks with medical practice experience can help practices understand if and when these activities will generate the expected return on investment, then offer a loan to help bridge the gap.

Banks often prefer to broach the subject of medical practice loans by obtaining a highâlevel overview of a medical practice’s organizational and ownership structure. During this process, the bank will request that practice owner(s) describe the business structure.

This will be relatively straightforward for solo practitioners or small offices that own no real estate and are seeking funds for some standard equipment or operating costs. Loans to small practices may simply be made to the LLC.

For larger practices, banks will likely require a summary of all business entities, clarify their ownership structure, and review how each generates revenue and incurs expenses as well as the extent to which money is transferred between entities. For larger multiâentity practices, the total amount borrowed may actually be parceled into individual loans to the separate business entities.

Outlining how borrowed funds will be used 

Once the structure has been clarified, the practice and the bank can begin to discuss how the borrowed funds will help achieve business goals, what the financing terms are, and how loan repayment responsibilities will be assigned.  

For a solo practitioner or small medical practice, the question as to who will invest the funds and be responsible for making loan payments will probably be pretty clear. The same is true even if there are two or more entities, so long as the physicians involved have equal ownership.

A multi-entity practice may seek to borrow funds that will be used by only one entity, such as investing in expensive equipment, or to purchase, build, or remodel office space. Clarifying how the funds will be used and by which entity will be a key part of the loan application process.

Banks are wellâversed in the concepts of utilization rates for medical equipment. They can help medical practices draw comparison rates for the technology they wish to purchase versus the equipment they already have.

When discussing loans for major investments, experienced banks are able to discuss the options practices have to depreciate real estate, office technology investments, and the purchase or lease of expensive diagnostic or treatment equipment. Banks are also familiar with the associated costs of remodels, rennovations, and new construction. If they are local, they likely already know the community’s demographics and can offer an opinion as to whether the target market will sustain enough business to justify the expenses and generate revenue to cover repayment.

These discussions may result in medical practices revising their initial loan request. It is also at this point that final loan amount may be divided into multiple loans for individual business entities.

Once the medical practice and bank reach an agreement on the amount of the loan and its use by the practice or its entities, the next step is to conduct an analysis of the practice’s financial situation and a determination of the partners’ individual abilities to guarantee the repayment requirements.

Practice owners most likely assume that cash flow from current patient services, coupled with fees from new patients and services utilizing the new technology or real estate, will cover loan payments. This is not always the case.

Banks will ask about a practice’s current and projected patient profile, payer mix, claims submission practices, and collection rates. Practices should consider whether Medicare, Medicaid, or private payers will cover the tests or treatments available with the added technology. Practices should also consider patient payer mixes. Practices with a large number of private insurance patients may have higher reimbursement levels but require more time and staff to process.

Experienced banks will do their best to draft a loan obligation that medical practices can meet. Ultimately, banks will create a loan agreement for the practice or its entities and identify individuals who are responsible for making loan payments as scheduled. 

For small practices, this will normally be the physician owners. In larger practices, or one in which borrowed funds are divided into individual business entity loans, several physicians may be responsible. Regardless of the size of the individual obligation, the bank will also require each physician who signs the agreement to provide a personal financial statement, usually accompanied by two or three years of personal income tax records.

Securing bank loans is a common business strategy among medical practices. But medical practices still need to do their homework about what they need and also who they should partner with to ensure their longâterm profitability.

Chad Pfeif is a branch president who specializes in providing financing to medical practices. He is an alumnus of The Graduate School of Banking at Colorado.

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Before a bank issues you a loan, it will review your financial statements, your corporate structure, and how the loan will be used to make sure you’re a sound investment.

What banks need to know about your medical practice

Like most small and medium-sized businesses, your medical practice may, at times, require a line of credit or a loan. But you present a lender with a much different set of circumstances than most other types of businesses. Net income and cash flow are critical factors in evaluating the financial strength and ability for a business to make payments. As a medical practice, these primarily depend on your efficiency in collecting funds from insurers. The more your practice maximizes the effectiveness of your billing systems and mitigates the built-in financial risks of this business model, the more attractive you will be to a lender.

Where do you turn for this financial support? If you do some searching for medical practice loans, you’re sure to find a number of national or regional online lenders that can provide you with funds virtually sight unseen. However, like many small businesses, you may need more than just immediate access to funds. You may benefit from having a long-term lender that can also act as a financial adviser because it understands the unique nature of your business and the specific characteristics of the market you serve.

One option is a community bank where your practice is located. Community banks pay close attention to local demographics and economic conditions, likely the same factors that influence the makeup of your patient load and payment mix. When these elements shift, community banks can anticipate the impact on their customers, including your medical practice.

However, being local does not make every community bank equal in its ability to serve you. Whether you are approaching a bank or they are approaching you, you need to conduct your due diligence to evaluate how well a bank is positioned to serve you. Here are five questions you should ask during the early stages of your discussions.

1. Do the bank’s commercial loan officers have experience working with medical practices like yours?

A bank that already provides financing to medical practices deserves consideration. However, medical practices in the same community can differ in terms of the demographic markets they serve, their patient loads, payer mixes, and overhead-all of which impact their need for and allocation of funds. A bank that has worked with practices similar to yours in terms of size or specialty is likely to have a better understanding of your anticipated cash flow, ongoing financial requirements, and revenue stream.

2. Does the loan officer understand that your claims payment and net income is largely impacted by your particular patient profile and payer mix?

The claims evaluation procedures and reimbursement levels among the insurers you accept may vary greatly and can frequently change. If you serve patients covered by Medicare, Medicaid, supplemental, employer, or private insurance plans, you are most likely submitting hundreds if not thousands of claims monthly to multiple payers and monitoring those collectibles. If your patients are primarily covered by private insurance, the claim payments could be larger but require more time. This impacts your cash flow.

Your bank must understand how effectively your practice manages claims submissions and monitors collection rates. It must also recognize that your approach cannot automatically be compared to a similar practice in a different neighborhood or perhaps a practice in a different specialty.

3. Does the bank fully understand your billing process, ongoing financial requirements, and financial management procedures?

If your practice is successful, you no doubt spend considerable time dealing with the health of your patients. Still, you recognize that you are primarily responsible for assuring the financial health of the practice, including your ability repay loans or meet longer term financial obligations.

You need a bank that supports the steps you have taken to manage billing, collections, equipment financing, technology systems, business and malpractice insurance, staffing needs, and other aspects of your business. It should appreciate your decision to have a comptroller or rely on highly-competent staff to deal with these critical business issues on a day-to-day basis. Perhaps you have even retained an outside firm to handle billing and collections. Regardless of your approach, you require a lender that understands how your approach to managing your practices finances results in your ability to meet your financial obligations.

4. What if you need funds to expand your practice?

Perhaps you are planning to add more physicians, expand into another community, or build or rent more office space. You will need funds to purchase or lease equipment and fixtures, hire more support staff, and pay other recurring or one-time costs. When considering your ability to handle this debt, you want a bank that will accurately take into account your practice history, medical specialty, and professional standing at your current practice as well as your plans to build and maintain a patient load and/or revenue stream through your expansion.

5. Adding physicians should increase revenue, but does the bank understand that billings for those doctors will initially be delayed?

New physicians joining your practice, especially those whose patients follow them, may quickly begin to generate billings. However, they must file new applications with the insurers you accept before claims are paid. This could require 90 days or more. This is more or less the same for all practices, but the bank must understand these circumstances when providing you with working capital or a line of credit to support new doctors.

This is a challenging financial time for medical practices. The cost of providing patient care, including equipment, personnel, administrative technology, and facilities is constantly rising. Meanwhile, claims payments levels and time frames require constant monitoring to maximize revenue. Practices that seek additional funds will find no shortage of lenders offering to finance their business. But they need to carefully review and identify which bank can understand and support their specific needs.

If you need financing or a line of credit, it pays to find a bank with medical practice expertise. Here are five questions to help you evaluate potential lenders.

Author | Chad Pfeif

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