What banks need to know about your medical practice

May 2, 2019

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.

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.

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 well‑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.

Reviewing financial statements

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 long‑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.