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Community Banks: A Viable Financial Resource for the Physician Business Model

By Ted Sheppe

For physicians, who spend their careers caring for patients, it can often be a daunting task to manage financial aspects of the business, in addition to running a medical practice. For that reason, it's critical to have experienced advisors, including a trusted banker, who can serve as resources as you plan for the future.

Whether you're a surgeon looking to buy an existing practice, a specialist seeking to purchase new equipment, or a family physician who wants to build a new office or hire more staff, business moves of this magnitude may require a commercial loan. The first question is often, "Where should I look?"

While there are numerous options from which to choose, not all deliver the same benefits. Make a short list of potential lenders by shopping around to compare offers. As you go through the process, keep in mind that bigger isn't always better - or safer.

Big banks offer name recognition, and thus on the surface might seem like the best option. However, smaller community banks provide their own set of benefits. For example, your connection with the community bank is typically built around a keen understanding of your practice's needs, and a focus on long-term relationships. Community bankers strive to understand the nuances of their client's business in order to create strategies that prioritize the owner's best interests. Community banks are also often nimbler and able to craft more flexible, customized solutions.

Another advantage of working with a community bank is that lending decisions are usually made locally ... which can translate into a more efficient experience with fewer layers of organizational bureaucracy. Key decision-makers may well be people you know. In addition, because community bankers rely heavily on personal relationships, they can be a good fit for physicians who also want to expand their presence locally.

Of course, whichever financial institution you choose, make sure it is healthy and in good standing with regulators. The Federal Deposit Insurance Corporation is an ideal resource for checking a bank's financial stability.

Once you've done the requisite due diligence, schedule an in-person meeting with the prospective lender. Be prepared to come to the table with a firm command of your business goals, current financial standing and plans for the future. Here are some suggestions to ensure that the conversation is productive:

Business Plan: Prior to meeting with a banker or lender, it is important to have a business plan in place - preferably one that has been reviewed by your certified public accountant. The plan should include articulated short- and long-term financial goals. Maybe you need a loan immediately to purchase new equipment, and you'd also like to open a second office within five years. With that in mind, look for a banker who thinks beyond temporary solutions, can anticipate the growth of your business, and will craft a lending solution to get you there.

Cash-Flow Cycle: Make sure you have a solid grasp of your accounts receivable and that your banker understands your payment mix. For example, how much of your revenue is private pay vs. insurance, Medicare or Medicaid? All of these payers operate on different payment cycles, some with a delay of 60-90 days. Talk with your banker about how these factors affect your cash flow, so he or she can design an appropriate solution. In some cases, your bank can offer a working capital line of credit against your receivables.

Expenses: Do you have a realistic understanding of both current and potential expenses? Take a look at the size of your practice and its growth potential. If you have one office, you may not need a controller or human resources professional now -- but that could change dramatically if you open multiple locations. Your vision for growth needs the infrastructure to match.

Risk: Conversations about risk should happen upfront. Banks look at debt levels, cash flow, and liquidity carefully. It is important to understand your bank's guidelines in these areas. Once banks start lending outside of a 3-to-1 debt-to-worth ratio, the loan request tends to get much more scrutiny, as it appears to be riskier. As an example, a high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt - practices often associated with high levels of risk. It's also important to be transparent about weaknesses in your business model or financial history. If you disclose these issues in advance, you and your banker can approach them proactively.

Types of Loans: Where are you in your business life cycle? A well-qualified banker will want to know where you are professionally to determine the appropriate metrics needed for a conventional bank loan. In some cases, an SBA 7A loan may be a better fit. This government-guaranteed loan program assists borrowers who have strong financial indicators even if they lack collateral or an established track record.

Securing a loan can be a complex undertaking, and your relationship with your lender is a vital component to your growth. In making an educated decision about your financial future, choose a banker who reflects the principles that your practice has been built upon: personalized care with a vision for success.

Ted Sheppe is the Executive Vice President for commercial banking at Axiom Bank, a Maitland-based bank that specialized in commercial loan for real estate and business purposes. He has spent much of his career helping physicians and healthcare businesses with their lending needs.

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