Whether you’re a recent grad dreaming of starting your own veterinary practice or a practitioner hoping to expand your existing practice, an opportunity may arise that calls for outside financing. This article provides guidance on how to prepare for making a loan application and what options are available to secure financing.
First, get your house in order.
Like other entrepreneurs, veterinarians need to present themselves and their businesses as worthy of investment. Personal credit history is a good place to start as it plays a key role in lender determinations. Request your free credit report from one of the three major credit bureaus – Equifax, Experian, and TransUnion. To increase your score, consider challenging credit reporting errors, be sure past due bills are brought current and unneeded debt retired. A good track record combined with a manageable debt load suggests an individual with the requisite discipline and restraint to meet future obligations.
Create a plan.
You’ll need to develop a business plan that demonstrates knowledge of the relevant market, a credible plan for generating revenue in that market, a viable operational model for service delivery, and an administrative approach that yields a sustainable business. To do this, you’ll need an understanding of the demographics, population growth, and competitive landscape in the target practice area.
If you’re expanding an existing business, your past, present and future (pro forma) financial statements, as well as key performance indicators, will provide critical insights into the current and future fiscal health of your business venture.
With this information in hand, you and your tax advisor or business consultant will be able to identify the rationale for external funding, define the use of loan proceeds, and work through the mechanics of how the loan would be repaid. This analysis will also determine whether you are eligible for credit and, if so, which loan types and terms are best suited to your present needs.
Finally, some lenders require life and disability insurance (or business overhead insurance) as a condition of financing. This requirement arises due to the fact that loan repayment depends on the life and health of the borrower. As underwriting for this insurance can take 4-6 weeks, it’s worthwhile to start this exploration well in advance of tendering a loan application.
Explore your options.
Small Business Administration
The Small Business Administration (SBA) offers a number of programs to help veterinarians launch or expand their practices and make them flourish. Using an SBA 7a general purpose loan, veterinarians have the ability to:
- Practice financing or refinancing
- Construction, purchase, renovation, or refinancing of a building or facility
- Equipment financing
- Debt consolidation
- Working capital
To be eligible, a veterinary practice must operate for profit, conduct business in the U.S., have revenues less than or equal to $7.5 million, and have reasonable invested equity. Equity may be gifted or contributed by a seller for practice acquisition. One-hundred percent financing may be available for established practices with a strong balance sheet. The borrower must demonstrate a need for funds to address sound business purposes that exceed the capacity of alternative resources (e.g., personal assets, cash flow from business operations). And the borrower must not be delinquent on any debt obligations to the U.S. government. Loan maturities vary – e.g., up to 7 years for working capital, up to 10 years for equipment, and up to 25 years for real estate. The SBA expects all loans to be secured.
An SBA 504 loan can be used to build a new office, renovate or expand an existing facility, or refinance a current facility as part of an expansion. While it is more difficult to structure 100% financing, this program offers fully amortized, long-term commercial financing at low rates with no balloons, calls, re-qualifying, or refinancing at a later date. Acquisition of energy efficient technology enhances borrowing capacity.
As noted earlier, low default rates among veterinarians make them attractive credit risks for commercial lenders. Many lenders offer 100% financing for practice acquisition, expansion, and upgrade. Limits to a borrower’s credit capacity include unattractive personal credit histories, high debt in relation to practice assets or equity, and concerns regarding core business skills to make a practice thrive. The latter includes one’s ability to develop and retain patients, make compelling arguments to accept treatment plans, and institute effective business and fiscal management practices. As with SBA loans, commercial lenders expect to secure loans with some form of collateral.
A lender’s market presence may change based on their desire to establish a position (or increase share) in the veterinary market, their overall credit availability, and their recent experience with defaults. As such, it’s worth talking to a few different lenders (or commercial broker) to find the most attractive terms. It may also be prudent to apply to more than one lender to improve one’s negotiating position.
When veterinarians do not have sufficient borrowing capacity or wish to manage the time frames over which they assume debt, sellers may need to participate in financing. With an associate partnership buy-in to buy-out, a solo practitioner adds a veterinarian who agrees to purchase 50% of the practice within a prescribed time frame. This arrangement works best for individuals who enjoy collaborating with other professionals and for whom a mentoring relationship confers mutual benefit. After working as partners for a pre-set or variable time frame, the associate agrees to purchase the remaining 50% share. If the practice has grown to occupy two full-time veterinarians, a strategy must be put in place to support the original veterinarian’s retirement.
An associate buy-out generally involves a shorter period of employment during which the associate establishes rapport with staff and clients while securing the financial resources for business transfer. The seller may opt to reduce his or her patient load gradually to make room for the buyer while adjusting to a new phase of life. The seller may remain as a part-time employee after the transfer for some period of time.
Cross your t's and dot your i's.
Be sure to provide a complete application with all required schedules and attachments. Be your own advocate and make a compelling business case for your credit request. Offer written explanations for anomalies or potential lender concerns. Identify assets that can be pledged as collateral. Respond quickly to lender inquiries.
Access to credit correlates strongly with practice success. Make time to attend to this key aspect of your practice. Leverage outside expertise to help polish and present your personal and professional stories in the best possible light.