Borrowing money in a credit crunch

July 4, 2008

It's still possible-with a solid banking relationship, a sharp business plan, and ample collateral.

Key Points

A veteran oncologist in the Midwest recently wanted to relocate his practice 55 miles away. To do that, he needed $250,000 for equipment and furnishings and a $250,000 line of credit to fund the first few months of operation.

Five years ago, half a dozen banks would have vied for his business and required nothing more than his signature, says Indianapolis practice management consultant Michael Brown.

This time, only one institution offered the doctor any credit at all. A term loan for the equipment and furnishings wasn't hard to secure since these assets represented collateral. But to get the line of credit, both the doctor and his wife had to provide personal guarantees and put their house up for collateral. "The banks are scared right now," Brown says.

For doctors, though, the credit tightening began around five years ago, when banks discovered that skimpy third-party reimbursements and rising costs were leaving many medical practices financially fragile, says practice management consultant Michael LaPenna in Kentwood, MI. "The days of automatic loans for anybody with an MD or DO are over," says LaPenna. "Banks are treating them like any other business."

The credit crunch only complicates matters. Both Brown and LaPenna report that some ultracautious banks have pulled lines of credit, or reduced them, for doctors whose income has dipped. "In the past, banks renewed them automatically every year," says LaPenna. "Now they're treating credit lines like brand new loans."

It's not all gloom and doom out there, however. While a Federal Reserve study in January showed that one-third of banks had tightened lending standards for small and large businesses alike, the dollar value of commercial loans grew in the first quarter. What's more, the credit crunch affects doctors to different degrees, depending on factors like where they live and bank and how long they've been practicing. Banks are stingier with doctors launching a new practice than with veteran clinicians boasting a proven income stream and more assets, practice management consultant Michael Wiley in Bay Shore, NY, notes.

The bottom line? Despite tight credit, doctors who can demonstrate that they're a good risk still are likely to secure the loans they need.

To help you out, we've interviewed consultants and bankers on the how-to's of physician credit. Their advice will hold true even when the current crunch eases up.

A lender wants all your business

One key to getting credit-and on good terms-can be summed up in the buzzword "relationship banking."

No, it's not about swapping stories about your kids with a bank VP. Rather, it means relying on one institution for all your practice and personal banking needs, as opposed to spreading your accounts around. Giving a bank more of your business boosts your loan application's appeal.

As a doctor, you're in the market for lots of bank services: A lockbox account for depositing insurance checks, a checking account, company credit cards, credit-card payment processing, and direct deposit for employee salaries. Then there are checking accounts, mortgages, and car loans on the personal side. Bringing all this under one roof benefits a bank customer, says Mark Huebner, vice president of healthcare banking at Commerce Bank in St. Louis. "I can be more competitive on the interest rate of a loan when we have this kind of relationship."

What he's talking about is not just a financial quid pro quo, with a bank giving you better loan terms because it's making money from you in other ways. Handling all your accounts gives a banker a more accurate picture of your financial health, which can calm his nerves about credit risk.