Finding Money for Your Practice
Monte Zwang
You have researched and planned and prepared; at this point, there is only one thing standing between you and opening the doors of your own practice: money. You are sure that because your business and marketing plans are so well designed, you will have multiple lenders ready to offer you the money you need.
Sorry, it doesn’t work this way. Funding your practice takes a black-and-white, detailed financial plan. The more organized your plan is, the clearer you can present it to a lender, which improves your chance of getting financing.
Lenders require that the balance sheet of a business meets specific criteria. For example, be prepared to show an increasing level of positive equity on your year-end balance sheets. Lenders also require that certain ratios (current ratio and debt-to-equity ratio) are in line. Lenders are willing to take risks proportional to the cost of money.
The Pieces of the Puzzle
Think of your practice in terms of a series of financial pieces you need to put together. These pieces are: sales, collections, direct costs, gross margin, overhead costs, profit, assets, liabilities and equity.
Prior to opening your doors, also include pre-opening operating costs, construction budgets, security deposits, bridge loans and loans from shareholders. You must understand these financial pieces and how to present them to a lender to secure a loan.
Types of Loans
Various creative methods of funding are available.
• Conventional lenders look for good credit, positive income, positive equity and feasible projections. Use a conventional lender if you have an existing business with three years of profitability and positive equity on your balance sheet. If your personal credit score is less than 650, do not go to a bank for funding; you will be rejected. These lenders love real estate as secondary collateral, and will most likely require a personal guarantee of the borrower as additional security.
• “Angel investors” is the term for family and friends. View a loan from your aunt the same way as you would a loan from a bank: Agree upon and sign documentation that establishes the terms of the loan.
• Revolving line of credit also is secured by accounts receivable or inventory and is available from a bank or asset-based lender. Credit cards are one example. An asset-based line of credit is available to borrowers who may not qualify for lower-rate, longterm financing.
• Construction financing is also known as bridge or mezzanine financing, and is usually of a short term. It is treated as a line of credit funded directly to the various contractors once certain aspects of construction are completed.
• Real estate, equipment leases and notes are other forms of business financing. In these notes, the collateral for the loan is the property or equipment itself. Equipment leases allow the borrower to acquire equipment without paying for it up front. There may be a tax advantage to leasing equipment; however, be cognizant of the interest rate, which typically is higher than conventional financing.
• Venture capitalists generally are private lenders who seek opportunity in businesses with a strong up-side potential. They will loan you money and help guide your business forward. In return, they get equity, typically 51%. This type of lending is called equity financing, as the collateral is the future equity of the corporation.
• Landlords may contribute dollars or rent concessions to the development of a tenant’s space. For this loan, the landlord may require a “percentage of gross sales” clause in the lease as repayment.
Creative Financing
At times, a borrower is just not strong enough to qualify for a loan. Loan guarantors, or borrowing someone’s credit, may help you qualify for less expensive financing. Be flexible and creative. The final package may be comprised of several lending solutions.
Perhaps a partnership with another practitioner is the way to go. The combined experience, resources, credit and synergy may help the business grow faster and allow for different financial options.
The Value of Details
Prior to meeting with a lender, know your credit score and be prepared to answer questions regarding derogatory credit issues. Assemble your information:
• Completed loan application
• Executive summary of a business plan
• Income tax returns (corporate, personal)
• Financial statements (income statement and balance sheet)
• Personal financial statements
• Credit report
• Cash flow budget.
You believe in your dream; it’s up to you to put the financial pieces together so a lender will believe in you, too.
Monte Zwang is a principal of Wellness Capital Management, providing cash flow and financial strategies to businesses in the wellness industry, including practices and day spas. Monte has been a consultant for more than 25 years, teaching entrepreneurs and company leaders in health care, real estate, resorts and hotels, and retail industries the strategies of cash flow management. For more information, visit www.WellnessCapital.com.
