Practice Strategies

Raising Money to Expand Your Practice

A growing practice is a sign of your success. But, like many physicians, you may lack the capital to pay for an expansion, especially if your plan for growth involves new construction or a substantial upgrade of your current facilities. There is a range of financing options to choose from when you are planning an expansion, and it is often possible to combine a variety of funding sources to meet the particular needs of your practice.

When you are seeking financing, banks are the obvious place to start. It is important, however, to find a bank that understands your business model. With medical practices under increased pressure due to rising costs and declining reimbursement rates, banks and other lenders are likely to scrutinize your request for funds to expand. Compared with other types of business, medical practices generally have few assets that could be liquidated in case of default.

Lenders may also be concerned about supporting investment in the construction of health care facilities. Buildings for medical offices are often stand-alone structures that must adhere to a stringent set of building codes and detailed specifications. This makes construction or expansion of health care facilities more expensive and riskier than many other building projects.

Rather than approaching a bank directly, some physicians turn to lenders that specialize in financing for health care providers. These firms are experienced in interpreting the financial indicators specific to medical practices, and they often have access to a wide range of underwriters. Niche lenders can be especially helpful for physicians whose credit ratings are less than perfect, or for those who are unable to obtain the level of financing they need from a bank. The interest rates on loans arranged by these firms are, however, often higher than those typically offered by banks.

In some cases, you may find that your practice qualifies for assistance from the U.S. Small Business Administration (SBA). While the SBA does not issue loans, it guarantees loans made by private banks or other institutions, making it easier for less-established businesses to get the financing they need. Through the 7(a) loan program, the SBA guarantees 75%–80% of the balance of a business loan. The proceeds of 7(a) loans may be used to pay for most types of expansion, including the acquisition of equipment and furniture; leasehold improvements; and the purchase, renovation, or new construction of land or buildings. Loans are also available for working capital. Compared with most bank loans, 7(a) loans offer longer amortization periods.

To benefit from the best possible loan terms and interest rates, cultivate relationships with banks and other potential lenders by demonstrating your ability to manage your existing accounts and credit lines well before you need to ask for a major loan. But, even if you find a banker who understands the health care provider business model, you can expect any potential lender to measure your practice’s capacity to repay the loan by analyzing its financial statements and operations. In addition to reviewing your personal and professional credit histories, lenders will take into account a variety of financial indicators, including your practice’s cash flow, earnings, accounts receivable, and collections history.

For bigger expansion projects requiring larger loans, alternative sources of financing may be available. These could include a bond issue or a private placement, which involves selling securities to institutional investors such as pension funds, insurance companies, or real estate investment trusts (REITs). Private placements may be arranged by specialized lenders as part of a broad financing package. There may also be opportunities to bring in equity investors or to partner with hospitals or other health care providers.

Any major expansion requires extensive advance planning. If you plan to grow your practice several years down the line, start saving now, while working toward putting your practice on the best possible financial footing.

For more information about our services to the healthcare industry, contact:
Maxine Lawyer, CPA, Partner - Dallas/Fort Worth at 972.448.6905 or
Philip Fox, CPA, Partner - Houston at 713.297.6914.

The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.
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