Using Small-Business Loans to Start a Practice

March 29, 2016

By: Steph Weber Small-business loans are a popular way for physicians to fund a new practice. Here’s how to borrow the right way.

Starting a new practice can be an expensive endeavor. From real estate to malpractice insurance to technology purchases, the costs frequently range from $600,000 to $1,000,000, according to Rob Wilson, CEO of CEI 7(a) Financing LLC (C7a), a nationwide lending firm specializing in the Small Business Association’s 7(a) Loan Guarantee Program to extend capital to small businesses.

Here's how to avoid the most common financing pitfalls and borrow the right way:

Before you apply

Before seeking out lenders, have a solid business plan in place. "[Lenders] are prevented from giving business planning advice by certain legal and ethical constraints," said Wilson. "Reaching out to lenders when you have a business plan and sound final projections will be much more productive, [as] they will then have something they can base a decision on."

Physicians should also spend some time evaluating financing options. Glenn Vallecillos, a board-certified plastic surgeon practicing in Beverly Hills, Calif., recommends asking colleagues for advice. "Familiarize yourself with the process of small-business lending and ask some tenured physicians in the community which banks they would suggest," he said.

The application process

When you're ready to apply, be prepared to present extensive documentation. According to Dan Croft, head of healthcare practice solutions at TD Bank, a financial institution serving the east coast, this includes personal tax returns, a curriculum vitae, and a personal financial statement outlining assets and liabilities. "It is [also] important to build or maintain a high personal credit score and demonstrate the ability to make timely payments on debts, such as a mortgage or student loans," said Croft.

Many physicians worry about how student loan debt will affect their ability to receive a loan. While these debts can complicate the process, it shouldn't be a reason for rejection, assuming the business model is sound. "Lenders will establish a global debt service coverage ratio to ensure that cash flow can clear a minimum debt-to-income hurdle," said Croft. This ratio accounts for all personal living expenses, including student loan payments.

The speed of the approval process varies greatly, depending on the loan amount, type of loan, and how quickly required documentation is provided. For start-ups, Croft suggests applying for financing 30 to 45 days prior to the targeted closing date. If commercial real estate is part of the financing, that window should be extended to 60 to 90 days. "Most lenders will hold their approvals for 90 days, so it is always better to apply early and ensure you have the proper funding prior to signing contracts, hiring legal assistance, or giving notice to an employer to start your own practice," said Croft.

Common financing pitfalls

Despite careful planning, physicians often fall prey to common financing pitfalls. Having too little working capital or reserves on the balance sheet, for example, puts physicians in a precarious position when unexpected expenses arise.

"Doctors, just like many other potential borrowers, will forget to check that the assumptions in their financial projections are reasonable and to explain explicitly why they are reasonable," said Wilson.

If applying with business partners, make sure everyone is on the same page regarding personal liability and the practice's goals. Croft recommends having this conversation early so that physicians can avoid costly delays or unexpected surprises during the application and approval process.

Finally, borrow wisely by asking yourself how the funding will impact the practice's bottom line. "It is very easy to frivolously allocate money in areas of your business that simply will not produce a return on investment," said Vallecillos. "If you can’t answer that [question], chances are the funding allocation is ill-advised. I run my practice like an airline - lean." 

Steph Weber is a freelance writer hailing from the Midwest. She writes about healthcare, finance, and small business, but finds her passion for the medical field growing in sync with the ever-changing healthcare laws.