Need Capital to Grow Your Practice? Try This Financing Hack.
If you haven’t noticed, private equity is making a sizeable footprint in the eye care industry. It’s what everyone’s talking about, and for good reason. It’s tough out there for independent practices, and especially smaller ones. Rapid consolidation among payers, health care systems, and physician groups is giving you a run for your money. To survive, you must grow and create economies of scale at the same time. That takes capital, and many independent eye care practices must turn to some type of financing to get that capital.
The Truth About Private Equity
Enter the private equity buyer. Private equity (PE) investment allows you to monetize the equity that you have in your practice. In short, you get a cash infusion in exchange for equity. You get to do more of what you enjoy (treating patients) and less of what you don’t (fretting about MIPS, for instance). The future is bright. Private equity financing can be a great fit for the right practice. But make no mistake—by taking advantage of PE, you’re selling your practice.
“Whether you believe it or not, no matter how it’s spun by the buyer, it’s a takeover,” emphasizes Bruce Maller, president and CEO of BSM Consulting. It’s like saying “I’m willing to give up control. I’m willing to give up control to get certain things that others can do for me to make my life better,” explains Maller, who sat on a PE discussion panel at the 2018 ASCRS ·ASOA Annual Meeting in New Orleans.
Why You Need Cash
Currently only about two percent of the ophthalmology market is consolidated under private equity, according to Paul Liles, a banker who spoke about financing options at the same Annual Meeting. But that number is increasing daily. And as that happens, the market stands to become even more competitive. “Tomorrow they’re a different competitor,” says Liles, speaking about PE-backed practices. You need to up your game to match their game, so to speak, he adds. Here’s where capital comes in handy. Use it to up your game by:
- Consolidating debt to improve your cash flow
- Purchasing owner-occupied real estate
- Expanding through acquisition
- Opening another location
- Financing a buy-in
- Building a surgery center
- Purchasing hi-tech equipment to give you an edge
Whatever your opinion is on PE, your practice still needs to grow and move forward to survive, so you still need capital. “One thing you may not know about this industry is how capital intensive it is,” Liles says . He cites physicians investing and constructing ASCs, opening new clinics, and buying real estate—either their own building or a majority share of an owner-occupied medical office building. “Even your clinic is significantly more expensive than other areas of medicine,” he adds.
SBA Financing: An Alternative to PE?
So what if you’re not so sure about private equity? What if the thought of someone else owning your practice doesn’t appeal to you? You’re not alone. “For many practices that we talk to, staying independent is the right answer,” reports Liles. “They’re not ready to sell out to the suits, as they say.” You need options. You may have considered a business loan, but have you considered an SBA-guaranteed financing? For practices looking to stay competitive and position themselves to best meet the growing demand for eye care services, an SBA (U.S. Small Business Administration) loan could be the answer.
Q: What’s the SBA? Is it like a national Chamber of Commerce?
A: Kind of. They both support small businesses, but with the SBA, there’s a lot more money involved. The SBA, founded in 1953, facilitates financing for small businesses—everything from microloans to venture capital. They also offer free counseling and training for entrepreneurs and established businesses, review legislation and advocate on behalf of small businesses, and ensure that at least 23 percent of government contracting dollars go to small businesses.
7 Reasons to Consider an SBA Loan
SBA loans are often misunderstood. In fact, they used to be thought of a last resort, Liles notes. Many borrowers assume that because SBA loans are government-backed, the lending process is more cumbersome and the terms aren’t as borrower-friendly as conventional bank loans. Not so. In reality, SBA loans have features that warrant a second look:
They are a lower-cost option.
Why? It’s not the SBA lending you the money—it’s still the bank. The SBA simply guarantees the loan. In case a borrower defaults, the SBA will pay back most of the loan to the bank. This lowers the risk for banks, and in turn they can offer these loans to small businesses at lower rates and more flexible terms. The catch? Qualifying for an SBA financing can be difficult. They typically require higher personal and business credit scores.
You don’t need much equity.
You can secure SBA financing with as little as 10 percent equity. And if you are acquiring a practice, seller financing may count as equity. Conventional bank loans often demand collateral (the more liquid, the better), and they require a more significant percentage of equity.
There are little to no prepayment penalties.
Banks lend money to make money, and that money comes from the interest that you pay. Pay your loan off early, and the bank loses out. They hit you with a prepayment penalty to recover some of the interest they would have received. In contrast, you can pay off your SBA loan as soon as you like, with no extra charge, if your loan term is 15 years or less. For loan terms over 15 years, you’ll pay a small prepayment penalty, and it’s capped at 3 years (1st year = 5%, 2nd year = 3%, 3rd year = 1%).
SBA loans are fully amortized.
That means that when you finish paying off the loan, you’ve paid all of the principal and all of the interest. You are free and clear of debt. But not all loans work this way. A bank may offer you interest-only financing, where you pay only the interest and none of the principal for the length of the loan term. A “balloon” loan is similar: your monthly payment includes the interest, plus only a small percentage of the principal.
These loans may sound tempting due to smaller monthly payments and lower interest rates, but watch out. When the loan term expires, you’ll be faced with a choice. Either make a very large payment (the rest of the principal), or refinance the loan. Even worse, if you put off that large payment and refi every time it’s due, you’ll remain in debt for many years. The SBA does not allow balloons—they consider them to be unreasonable terms, says Liles
Low—or no—down payment.
Say you want to buy something: equipment, an office building or another practice. The SBA offers 100% LTV loans (that’s loan-to-value). That means the bank will finance the entire cost of your purchase, with no down payment. Conventional loans often require 20 percent down (80 percent LTV). If you can get a 100 percent loan, the interest rates will most definitely be higher. And speaking of interest rates…
SBA loans have a maximum interest rate.
Banks are generally free to set their own interest rates for conventional loans, and interest rates are affected by a variety of external options (think, the Fed raising rates). But no matter where future rates are headed, there’s a ceiling for SBA loans. Currently, the maximum rate is the prime rate + 2.25 for loans with a term of 7 years or less, and prime +2.75 for loans with terms over 7 years. The prime rate varies (it’s a short-term measure), but basically the best rate that the most qualified borrowers can get at the time.
They’re easier to get—sometimes.
At Liles’ bank, SBA loans are financed through “an even smaller, even more flexible area of the bank” as compared to conventional business loans. Decisions are made quickly, because there is no centralized underwriting. For example, for loans under $3 million, only one person makes the decision. For loans over $3 million, only two people are needed. But that’s because Liles’ bank is part of the SBA’s Preferred Lender Program (PLP). While nearly all banks can offer SBA loans, participation in the PLP is limited to only the most experienced and active lenders that meet certain performance standards. You can find a list of PLP lenders at www.sba.gov.
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