Patients appreciate physician offices that look fresh and employ the latest technology, but these features can be expensive. For a physician in a solo or small-group practice, keeping up can mean taking on debt, and all the planning and tough decisions that entails.
"Where is this practice growing? How are they improving? What’s the overall plan? Because simply doing a remodel doesn’t mean that you will suddenly attract new patients or gain greater acceptance for your ancillary services. You have to have the bigger picture that goes with it,” says Gavin Shea, senior director of sales and marketing at Wells Fargo Practice Finance.
Choosing the right source for financing depends on the complexity of what the practice is trying to accomplish, Shea says.
“If it’s just simply adding a single piece of equipment and they already know how it will be integrated into their practice, there’s a myriad of options available to them, from manufacturer financing to existing bank relationships and other lines that that doctor may have in place,” he says.
For bigger projects, such as a complete office refresh or a relocation, working with a specialized lender can help you make a larger financial plan that will include the many factors that can come into play, such as downtime in the office during renovations or staff training needed to adapt to the changes.
“In those instances, working with somebody who has experience lending into the private practice arena and can understand that practice’s cash flow is going to be critical because the lender needs to be able to assess intangible assets, such as goodwill, properly when considering a practice’s ability to repay debt,” he says.
Mike La Penna, principal of The La Penna Group, a consulting firm in Grand Rapids, Michigan, suggests that practices break their financing needs into categories, then create a budget that reflects their historical performance and projects their capital costs as part of their expense structure.
Physicians can hire consultants to help them do this if they are considering spending several millions of dollars for a new building, because they might need to move beyond the standard banking realm and look to insurance companies or a real estate investment trust, he says. But for smaller transactions, the office’s accountants or bookkeepers can often do it.
Many private practices have a line of credit to cover expenses such as payroll when reimbursements are delayed, he says, and they should make sure they are using that properly. “They should take a look at what loans they already have because this is an opportunity to assess all of their debt,” La Penna says.
La Penna says that if physicians are thinking about making improvements to their property, a major consideration is whether they own the property or lease it.
“If they own the property, then refinancing a real estate loan is generally the most efficient way to go,” he says. “”If they are leasing, they want to see if the landlord will finance that or perhaps adjust the rent if the renters pays for the improvements.”
Similarly, equipment can be bought or leased. “A capitalizing lease allows the piece of equipment to be purchased at the end of the term for $1. It is essentially lease-financing. A non-capitalizing lease never pays for the piece of equipment fully. The person who is leasing to you retains the ownership,” he explains.
One consideration when deciding what type of lease you want is how long you plan to use the equipment. Some devices will be obsolete in three years, so you do not want to pay more to own it at the end of the lease. Leases that are non-capitalizing should specify how a renewal would be handled at the end of the term. The fees in a renewal period are typically less because the device is usually worth less than it was at the beginning, La Penna says.
In addition, there are tax implications to consider in the leasing versus buying decision. If you own the device, you can take the depreciation on it. For nonprofit organizations, this might not be an issue, but it can be for many others, he says.
La Penna also advocates keeping your overall budget in mind when looking at leasing versus buying. While buying might save you money on interest over the long term, your cash flow might dictate going with a lease with lower monthly costs.
Comparing lease rates is easier today than in the past, La Penna adds, because you can often get multiple bids on the Internet, instead of having to seek each one out individually.
When looking to purchase equipment, he suggests asking vendors if they offer financing. They may offer premium rates if you buy additional options, such as supplies or a service agreement.
Another place he suggests looking for financing is a local hospital or organization such as an independent physician association or physician hospital organization with which a practice may be affiliated, especially if the practice is looking to add electronic medical records or other technology that could tie into the larger organization. “They often have money available to get everyone on the same system and they can offer very favorable terms,” La Penna says.
When considering a loan request, La Penna says, lenders will look at a practice’s debt loading factor, whether it has consistent and/or growing revenue over time, and its range of services.
“If there are 10 doctors, that is more stable than if it is a 68-year-old doctor and a 30-year-old doctor, which might make you wonder if the practice can sustain a debt package,” he says.
La Penna notes that physician accounts receivable generally cannot be used as collateral. “Other businesses can let their receivables act as security for a loan but physicians cannot because there are preclusions against people collecting Medicare receivables unless they are the physician who actually performed the service,” he says.
Similarly, you generally cannot use your 401k account as debt security. “The government gave you a tax advantage to develop that 401k and it doesn’t want you signing that off against a new car loan,” La Penna says.
Shea says that when Wells Fargo considers financing for a practice, its top metric is cash flow.
“They need consistent and sufficient income to pay back the debt. ‘Consistent’ meaning they have had a steady or increasing level of revenue over the past two or three years. ‘Sufficient’ means looking at how much income is being generated from the practice today, how much debt are we asking this practice to pay back, and is there enough left over for a personal salary, personal debt, and a little bit of cushion to make that work,” he says.
If more than one physician is asking for the loan, their cash flow ratios are assessed as a group. “That’s where picking a good partner comes into play,” Shea says.
Having personal or medical school debt does not mean someone cannot qualify for a loan, but the person needs to show he or she has good cash flow, he adds. For that reason, Shea suggests practitioners aim to keep their monthly student loan payments as low as possible, rather than trying to pay that debt down quickly.
He also counsels physicians to think twice before taking on a $500 monthly car payment, for example, that could hinder their ability to finance a piece of equipment that costs $500 a month but could generate several hundred thousand dollars of revenue. “People often look at those as separate decisions, but they really are connected and (the personal debt) could inhibit your ability to qualify for a business loan,” he says.
Another issue that physicians need to “connect” is internal practice debt, says La Penna. “Debt between partners should be treated in the same businesslike fashion that debt is treated by external parties,” he says.
The terms of the loan should be spelled out in writing, with a bank or a lawyer acting as an intermediary.
“I tell my clients that we don’t know how things are going to turn out in life. You could end up having to collect the debt from my spouse, or my estate, and having it in writing will help make the process smoother,” La Penna says.
One type of debt that should definitely be spelled out clearly in partnership agreements is how a partner buyout would be handled, LaPenna says. It should cover how long the remaining partner(s) have to pay the departing person, as well as what the interest rates will be and a specific due date for monthly payments, if applicable.
Tammara Plankers, assistant vice president and manager of client practice services at Wells Fargo, sometimes hears physicians express reluctance to invest too much in their practice because they are afraid no one will want to buy it when they retire. However, she adds, she also hears from physicians who want to work for themselves instead of being an employee.
“There are people who would greatly benefit from buying a practice that has that goodwill and patient flow,” she says. “As human beings, we’re very driven by habits, and many patients who are used to going to a specific place for medical care will continue, so there is something to sell. That goodwill is something that we see that maintains itself. It is valuable.”
She recommends that doctors who are planning to retire in three to five years should consider upgrades such as new equipment, better technology, fresh paint, new flooring and new chairs in the reception area to keep their practice up to date.
“This type of investment will do two things. It allows them to make the practice more attractive to potential buyers when they are ready to sell, and, in the short term, it will help them attract new patients and maintain or grow the practices revenue,” she says. “It can be tough to find a buyer or for that buyer to find financing if the practice is experiencing declining revenues, year over year.”
If applying for a credit line, Marc Lion CPA, CFP, founding member of Lion and Co. CPAs LLP in Syosset, New York, recommends bringing these items with you: