What term should financing be for?

Much is often discussed about the type of financing that a practice chooses.    Another very important point is the term of the financing.   Current financing terms vary greatly, with repayment terms of 3 months to 5 years in most cases, even longer in other cases.

The effect of the payment on the company's monthly cash flow should be one of the most important factors.    Also, the payment should be considered in the context of whether the company may borrow again in the near future.    If a company thinks they may very well borrow again in the near future, then getting the lowest monthly  payment may be in their best interest.

Even though such an approach will cause the borrower to have the highest total repay amount of all the choices,  if this allows the borrower to take advantage of lucrative future opportunities, this may well be the best decision.    Future opportunities which may generate significant income over the course of years that a practice does not want to miss out on, such as a Digital X-ray, may require additional working capital the practice does not have, and require additional borrowing.

Alternatives to Merchant Loans

In recent years, due to the economy, due to very tight lending standards and simply not qualifying for traditional funding programs, many business owners in the Medical field, including Physicians, Dentists and Chiropractors have been turning to alternative financing programs.

Often, these programs have included loans against the credit card, or merchant receivables of a practice. However, there are many practices that generate significant Gross Revenues, but little, or very little of it is through Visa and Mastercard sales. Surgeons in particular generate less than the average percentage of their sales and income by accepting credit cards. The percentage a patient may pay often will come out of pocket.

Many practices may employ financing based on Gross Sales. For many Medical Practices, this may still be traditional financing based on their field, profession and significant annual Gross Revenues. Banks and other traditional funding institutions still hold Medical professionals in higher regard than regular business customers with the same revenues, time in business, credit and similar net worth.

The reason for this is that Medical professional have one of the lowest default rates of individuals or businesses.

Another reason is that they are specialty licensed. Their skills are very specialized in many cases, and in demand. Finally, Medical practices go out of business at a far lower rate then businesses in general. This is perhaps the biggest reason banks and other traditional financing sources have long sought out Medical professionals.

Many banks and other traditional funding sources have special departments whose sole purpose is to call on, solicit and close business with Medical professionals . Many banks have departments known as professional banking which they have for this purpose.

Many Medical professionals end up obtaining financing based on Gross sales through these traditional sources. However, there are a significant number that do not and pursue other forms of financing with other institutions through their Gross Revenues.

More Physicians taking to Merchant Loans

More Physicians are taking to merchant loans for financing for their practice. This must be considered a barometer with regard to financing in the medical industry. An increasing number of medical practices, both Physicians and Dentists turning to these methods of financing may be a cause for alarm.

The short term gain is the cash flow the practice needs. However, with an average repay term of only 6-9 months, the repayment schedule's negative impact on the Practice's monthly cash flow may make the disadvantages outweigh the advantages for some practices. Careful consideration to the impact on monthly cash flow must take place.

10 to 20 years ago, physicians, including Dentists remained in traditional financing programs, primarily at banks. The ever increasing financial challenges of Insurance reimbursement rates and insurance premiums erode the net profits of Medical practices. The trend is sure to continue as insurance liability rates do not appear to be leveling off to the level of inflation. The trend in recent years has been for reimbursement rates to decrease, rather than increase, so the trends are not in favor of the Physicians in this regard as well.

Physicians increase use of Alternative loans

Secured asset based loans on equipment, and unsecured funding based on Gross sales are two of the most recently used alternative funding options employed by Physicians.

For the reasons cited in recent posts, Physicians continue to increase their usage of alternative loan products. Continued escalating malpractice insurance premiums and the constant threat of permanently cutting Medicare Reimbursement rates have forced many Physicians, Dentists and Chiropractors to seek alternative financing.

Since almost all business have sales, financing based on the Gross Sales of the business has become increasingly popular. One additional reason for this is that Physicians often initially begin or further their practice through SBA Loans. SBA Loans often require the Physician to sign over all assets, furniture and fixtures of the practice. This make it difficult or impossible for the practice to obtain financing or working capital when they have future needs and requests.

Increases in these alternative funding programs will be more closely looked at in the future.