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 envision a waiting list of patients, a talented and attentive staff; and because of your success, you will be profitable early on and pay back your loans early! 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 to launch your practice. Isn’t this the way it’s supposed to work?
Sorry, but no, it doesn’t work this way. Funding your practice takes more than a great vision for success. It 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.
Finding money you can use for growth is available if a feasible plan is submitted to a lender; even mom or your wealthy uncle need to understand the risk of lending you money. Lenders require that the balance sheet of a business meets specific criteria. For example, it is important to understand what positive equity is, and to be prepared to show an increasing level of it 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, but the amount of risk is proportional to the cost of money.
The Pieces of the Puzzle
Prior to determining how you will fund your practice, you need to have a clear, but flexible, picture of what it will look like. Instead of looking at your practice as a series of procedures, treatments and services, think of it in terms of a series of financial pieces that you need to put together. These pieces are:
- Sales
- Collections
- Direct costs
- Gross margin
- Overhead costs
- Profit
- Assets
- Liabilities
Prior to opening your doors, these financial pieces also include pre-opening operating costs, construction budgets, security deposits, bridge loans and loans from shareholders. To be successful from pre-launch to consistent business, 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 for financing a business venture. Financing takes many forms and is available from a wide range of sources, including banks, credit unions and family members. Lenders loan to credible borrowers with a feasible plan.
- 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. Do not go to a banker in your eleventh hour of need and ask to have your past three years of financial losses funded, or your contractor’s overruns paid – you will be labeled as “high risk.” 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. She may be willing to loan you a portion of her retirement, but that doesn’t make it a good lending decision. Sometimes there is limited documentation or agreements, or fuzzy terms of repayment involved with a loan from an angel investor, and this can make for confusing and uncomfortable situations. If you are borrowing money from an angel investor, be sure to agree to and sign documentation that establishes the terms of the loan.
- Revolving line of credit is another form of business financing that is secured by accounts receivable or inventory and is available from a bank or asset-based lender. Credit cards are a form of a revolving line of credit. An asset-based line of credit is considered alternative financing and is available to borrowers who may not qualify for lower-rate, long-term financing.
- Construction financing is also known as bridge or mezzanine financing. This type of financing is usually of a shorter term than conventional long-term financing (one year or longer). It is a treated as a line of credit funded directly to the various contractors once certain aspects of the construction are completed as their liens are removed.
- 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 vs. purchasing equipment; however, be cognizant of the interest rate being charged, as equipment leasing rates are typically higher than conventional financing.
- Venture capitalists generally are private lenders who seek opportunity in businesses with a strong up-side potential. For their investment, they get equity and control. You get the benefits of their money, a seasoned business partner and savvy investor. 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 can be a source of financing. It is not uncommon for a landlord to contribute dollars or rent concessions to the development of a tenant’s space. Don’t be afraid to ask. 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. If additional credit strength is required, loan guarantors, or borrowing someone’s credit, may help the borrower qualify for less expensive financing. Be flexible and creative. Your final package may be comprised of several lending solutions that can be consolidated or re-packaged at a later time as the business proves its profitability and financial credibility.
Do you really want to do this on your own? Perhaps a partnership with another practitioner is the way to go. Your combined experience, resources, credit and synergy may help the business grow faster and allow for different financial options than you may have on your own.
The Value of Details
Prior to meeting with a lender, know your credit score and be prepared to answer questions regarding derogatory credit issues before presenting your application. Assemble your information:
- Completed loan application
- Executive summary of your business plan
- Income tax returns (corporate and personal)
- Financial statements (income statement and balance sheet)
- Personal financial statements
- Credit report
- Cash flow budget.
Funding your practice is not difficult if you as the borrower are organized, informed, creative and realistic. You believe in your dream; now 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.
