By Christopher Kane
One of the biggest decisions that an eye care professional may grapple with is the decision of whether to acquire an eye care practice. A big part of this decision entails understanding the financing options available to help make this dream a reality.
There are three main types of financial institutions to consider for an eye care loan: community banks, finance companies and large national banks. Each institution will have pros and cons— its own culture and way of getting things done. It is important to understand which option is a good fit for you and your long term goals on a holistic level.
When considering the type of financial institution, think about the following things in terms of who you want to start this type of long-term relationship with:
• Does the banker and bank have experience in the health care industry and specifically, the eye care industry?
• Where are the lending decisions being made. Locally? Regionally? Nationally?
• Is there flexibility regarding repayment schedules? Are there prepayment penalties?
• Will the financial institution provide sufficient working capital to you as you’re ramping up operations?
• What are the rates, fees and fee structure?
• What other intangible benefits can they offer you?
• Does the financial institution support your industry?
As you are weighing your options, you’ll want to understand what the requirements are for the loan. Will they require a cash flow covenant, life insurance, disability insurance, etc? How transparent are they in communicating these requirements? Effective communication with your banker throughout this process is critical. You will likely want to ensure that your banking partner is accessible and consultative.
Once you’ve made a decision, there are several items that you and your team of advisors (including your banker) will want to review as you move forward in your due diligence process. From a lending perspective, banks are in the business of assessing risk, mainly in the cash flow that you will expect to purchase. Here are some questions that will be evaluated:
• How do the practice efficiencies stack up to industry standards?
• How much cash flow is available to service the proposed debt, your existing personal debt and your living expenses?
• What do cash flow and practice efficiencies look like if there is patient attrition? This sensitization exercise is a good way to understand the risk to your future cash flows.
• In what type of future improvements do you expect to invest?
• What is the transition plan expected as the buyer enters the practice and the seller exits?
While the eye care practice you are purchasing is an important part of the financing decision, your lender will also want to build a relationship with you. Understanding your personal financial history and future vision for the practice is critical. Your personal work experience, procedure skill set in comparison with the subject practice, personal credit history and what your vision for the practice may be as you acquire it are all important components of building this relationship.
Banks are very willing to lend to eye care professionals. Historically, health care providers have some of the lowest default rates in the nation. Plus, it continues to be a growing field with spending on health care at $3.8 trillion annually. Likely this will continue to rise as our population continues to age and live longer lives.
As you move forward in making this big decision, you will be wise in choosing your business advisors carefully. Having a consultative, engaged relationship with your advisors, including your banker, is important and can save you time and money as you march towards making your dream a reality.
Christopher Kane is vice president and commercial banking manager at Pacific Continental Bank. He can be reached at email@example.com.