Editor’s Note: This is the second in a two‑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 multi‑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.
Read more: 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.
Taking a top‑down approach
Banks often prefer to broach the subject of medical practice loans by obtaining a high‑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 multi‑entity practices, the total amount borrowed may actually be parceled into individual loans to the separate business entities.