Lori Scarlett, DVM, had been thinking of opening a veterinary practice for a while. When space opened up that she thought would be perfect, she jumped on it. But her initial attempts to find financing were frustrating. She talked with local banks, but they required more money down than what she wanted to invest and they requested a more detailed business plan than what she had prepared. Her search led her to a large national bank that was more flexible.
“They offered the best deal,” Dr. Scarlett said. She got the financing she needed, without an expanded business plan, and went on to open Four Lakes Animal Clinic in Madison, Wisconsin.
The line of credit initially accepted by Dr. Scarlett featured payments that increased over time, allowing her to start building out the clinic and acquiring equipment. “I didn’t pay anything for the first four months,” she said.
Whether you’re hoping to open or expand a practice, I recommend that you consider one of these four types of financing.
1. Bank Loans
Loans or lines of credit are the most popular type of financing received among businesses with one to 499 employees, according to the Federal Reserve Banks’ 2019 Small Business Credit Survey. Eighty-five percent of the business owners surveyed applied for this type of financing. Many of them, like Dr. Scarlett, turned to traditional banks, both large and small.
Eric Chapman, DVM, used bank financing to help establish his veterinary practice, Draper Animal Hospital in Draper, Utah. His quest to go out on his own had started more than a decade earlier. He conducted research and created a business plan, but then “life happened,” he said, and he wasn’t ready to take the plunge until 2014. He found a practice he wanted to acquire and begin hunting for financing.
His research led him to a veterinary channel lender that not only gave him a loan but provided the expertise that helped make the process less painful.
“There is a whole process of buying a practice,” Dr. Chapman said. “All the negotiations, the property purchase. The easiest part of all of that was my loan. [The bank team] went above and beyond. They had the business management tools to assist [with the process].”
Most of the Small Business Credit Survey respondents chose a bank with whom they had an existing relationship. In fact, 58% of those who applied to large banks and 65% who sought out smaller banks cited an existing relationship as the top factor influencing their choice of lender.
Your current bank or credit union is a great place to start, but it doesn’t hurt to cast a broader net to see whether other financial institutions are eager for your business.
2. SBA Loans
SBA loans are guaranteed by the U.S. Small Business Administration but made by individual lenders, not the federal government. These loans are considered one of the most attractive types of financing because of the low interest rates and favorable terms.
A variety of SBA programs, the most popular being the 7(a) loan, might be a good fit for a veterinary practice. Several types of 7(a) loans exist, and requirements vary. But broadly speaking, the program guarantees loans up to $5 million.
The money can be used for different purposes, such as:
- Purchase or expansion of an existing business.
- Purchase of machinery, supplies or materials.
- Working capital.
- Debt refinancing.
For 7(a) loans of less than $350,000, the lender is required to screen the application by pulling what is called the FICO Small Business Scoring Service LiquidCredit score. The score can take into account the owner’s personal credit, business credit and financial information. The SBA requires a score of at least 140 out of a maximum of 300, but many lenders want to see scores of 160 or higher.
Understand that while the SBA sets minimum requirements for these loans, individual lenders might have additional requirements. Being turned down for an SBA loan from one lender doesn’t necessarily mean you can’t get one from another lender.
If your practice leases its space from a commercial building owner, you’ll need a document, called a lease subordination agreement, signed by your landlord. The agreement can be tricky to acquire, so discuss it with your landlord early in the process of applying for an SBA loan. Also worth noting: SBA loans often take weeks, and sometimes months, to be approved, so plan accordingly.
3. Equipment Leasing and Financing
Dr. Chapman purchased outright a significant amount of equipment for his clinic, Draper Animal Hospital, but he also acquired equipment on a lease-to-own basis. He considered the overall cost in his decisions.
“Most of my equipment for my in-house lab is through the same company,” Dr. Chapman said. As part of the package, he said, he “signed an agreement to use their reference lab and their expendables.
“As long as we reach their minimums, there is a discount.”
Financing might be offered by the equipment seller or a third party. Such financing might be easier to qualify for because the equipment serves as collateral. The lessor might check the practice owner’s personal or business credit, but high credit scores typically are not required. Understand that the lessor will make a Uniform Commercial Code (UCC) lien filing, a notice in the public record that reports a security interest in your property. UCC filings are typically included in business credit reports.
Because equipment leases can be complex, be sure to run them by an attorney familiar with such contracts. You don’t want to become trapped into lease payments for non-functioning equipment, be blindsided by automatic renewals or find yourself paying more than expected for reasons built into the fine print.
4. Business Credit Cards
For Dr. Chapman and Dr. Scarlett, paying for expenses on a business credit card is a no-brainer. Both prefer cards that offer cash-back rewards.
“I use my cash back to offer staff incentives and staff bonuses,” Dr. Scarlett said.
Dr. Chapman stockpiles his cash-back rewards for a Christmas celebration. “The more we do in our business,” he said, the “more money back and a larger celebration.”
He charges $20,000 to $30,000 a month on his business cards and says, “It’s pretty incredible what that ends up being at the end of the year.”
Both practice owners pay their cards off in full each month to avoid interest charges. But business owners who need wiggle room when cash flow is slow can pay off a business credit card over time. The average business credit card interest rate is about 18%, according to WalletHub’s Credit Card Landscape Report.
Many issuers offer a 0% rate on balance transfers for as long as 18 months. A fee is often charged — 3% of the transferred amount is common — but spread out over a year and a half, it’s a nominal cost.
Small-business credit cards also can help a practice build a strong credit history. Many of the issuers report an account holder’s payment history to commercial credit-reporting agencies such as Dun & Bradstreet, Equifax and Experian. (A list of issuers and their reporting policies can be found at http://bit.ly/2m4DtH6.) A few also report all activity to the owner’s credit history, something to be aware of if you are seeking personal financing such as a mortgage.
Dr. Chapman often takes a methodical approach to acquire equipment for his practice. For example, here he describes the process he went through when choosing a new digital X-ray machine:
- I did my research to find the right equipment. Price is only a component of the value. The product has to be useful and effective.
- I decided, “Do I want to pay for it now or do I want to finance it?” That discussion takes place with my accountant, and part of the discussion is about cash flow.
- I negotiated the time frame and let the manufacturer do the research with outside lenders. I could have done it, but these companies were finding great terms. The interest rate was really low. Then it becomes a no-brainer.
Both Dr. Chapman and Dr. Scarlett said they are inundated with financing offers they ignore. Their practices are growing and in good financial health, which means they have plenty of options for low-cost, sustainable financing.
Still, many business owners encounter a steep learning curve when it comes to getting financing. Dr. Scarlett initially received a line of credit for working capital, but it had a higher interest rate and she submitted to the bank bills that were to be paid out of the credit line. Once she opened Four Lakes Animal Clinic, the line of credit stopped and was rolled into a lower-cost loan. She then paid bills from the term loan.
“It was confusing how that all worked and wasn’t explained very well,” she said.
Still, her practice is thriving and she’s on track to pay off her 10-year loan two years early.
“Life is good,” she said.