Though the economy is struggling, veterinary lending is alive and well.
Financial experts, bankers, government officials, and politicians agree: The American economy's in trouble. Banks offered home loans to thousands of buyers who couldn't afford the payments. Homeowners began to default; banks began to foreclose; inflated home prices began to plummet. And that's the housing crisis in a nutshell.
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Now for the credit crunch. The shady home loans were bundled as securities and sold to investors who are now swimming in the incurred losses. With no more selling of subprime mortgages to gain capital to lend, banks are tightening the strings on their emptying purses, and Wall Street is reacting with plunging stock prices. Congress has passed a bill allocating $700 billion of relief to grease the wheels of commerce, but at press time, businesses were still finding it difficult to secure credit.
So what does this mean for you? All the implications for veterinary practice aren't yet clear, but it seems that the crisis could affect business lending. Barring a serious recession that will hit everyone in the nation regardless of profession, veterinarians are most likely to feel the bite when they're ready to purchase equipment or to buy, sell, or build a new practice. Who will lend to them when banks are short on capital?
The bottom line
A regional bank in California recently froze all lending for a month or two—which swept at least one veterinary practice into its wake, says Tom McFerson, CPA, a partner at Gatto McFerson in Santa Monica, Calif. "Frozen credit could be a wave starting to happen," McFerson says. "Two years ago, fairly decent credit and cash flow made for a slam dunk with banks. Now it's harder."
Despite a few grim examples, most Veterinary Economics Editorial Advisory Board members and representatives from major veterinary lenders think deals will get done. Veterinarians remain an excellent credit risk, with one of the lowest default rates in the nation. Yes, smaller banks without veterinary expertise may balk at lending to veterinarians, whose collateral entails credentials and clientele, not cash and houses. But lenders who work regularly with veterinarians say that credit is still flowing.
As recently as October, banks were still lending to veterinarians—even with the credit crunch and Wall Street troubles all over the news, says Veterinary Economics Editorial Advisory Board member Gary Glassman, CPA, a partner at Burzenski and Co. in East Haven, Conn. Banks have let go of marginal transactions, where practice profits would barely cover the cost of the loan, but viable proposals still receive funding.
That's nothing new, says Gavin Shea, director of partner services at Matsco, a lending organization for healthcare providers. "Those deals that are barely profitable have always been the ones we looked at with a keen eye," Shea says. Overall, those marginal deals will find it harder to find financing. "The consequences of not managing your credit score and other things are now magnified in this environment," he says. "We advise clients to maintain a good credit score. That's something they can control." (See "Control your credit" for tips on how.)
How to ... Control your credit
Another advisory board member, Dr. Karl Salzsieder, JD, of Salzsieder Consulting and Legal Services in Longview, Wash., points out that bad deals are always bad deals, whether the borrower is a veterinarian or anyone else. One practice owner he knows couldn't find a loan for a potential buyer because she stipulated that she needed to work at the hospital after she sold it; the financial plan just didn't work with her salary added on. Another doctor was considering buying a practice in a financially struggling rural area without an adequate clientele because she couldn't find an urban job. Both projects failed to receive financing. But these are exceptions to the rule of general veterinary success. "As long as there's good cash flow in the practice, I haven't seen a lender turn anybody down," Dr. Salzsieder says.
Dr. Karl Salzsieder
Some experts do say banks are less willing to offer 100 percent of practice sale financing. Glassman says more banks want sellers to provide part of the loan to their buyers. They may be on the line for as much as 10 percent of the purchase price. In deals like these, sellers also will sit in the "second position" in the loan, Glassman says. "If for some reason the buyer can't make a whole payment, the bank gets paid first," he says.
However, Cole Gillespie, regional sales director for Bank of America Practice Solutions, says his organization is still providing 100 percent financing to veterinarians. He does counsel that buyers contact lenders as soon as possible, before the terms of a sale are set. "Buying and selling a practice, and determining loan feasibility, are labor-intensive processes," Gillespie says. "The more work a buyer and a seller put into the deal, the more expectations rise and the more their hearts are in it." If a buyer can't secure financing for the amount a seller wants, it's best to know that up front and rewrite the deal if possible, he says.
In addition to contacting lenders early, experts and loan industry representatives say veterinarians should contact at least three lenders to compare deals. Gillespie says loan customers sometimes focus on interest rates and don't look closely enough at terms. Which deal is better for the life of the loan? Are there fees you need to consider in the comparison? Would you be better off with a graduated payment plan to rev up cash flow for your practice startup or a package deal to pay for equipment, a remodel, or a new building?
Glassman agrees that it's important to consider fees and loan length consider when you're looking at options. Many veterinarians sign up for a Small Business Administration loan when they could nab cheaper financing elsewhere. "One doctor I know went to a strictly SBA lender, and the fees were in the $70,000 range for his project," Glassman says. "Then he went to a non-SBA lender, and the fees were $50,000. That's big."
When you're looking to buy, it's also important not to commit too early to a particular practice or a particular location. Veterinarians can fall in love with their plans and wind up failing Glassman's 10-year smell test. "If you can't pay off a new practice in 10 years, you should reconsider," he says.
As the credit crisis worsens, lenders will look around for their best bets, too. They'll look at the feasibility of a practice deal but also at individual veterinarians' credit scores, Glassman says. Mark Edwards, president of the SBA group at lender BB&T, says lenders focused on the veterinary market know what they're looking for in a good practice. "Banks are examining loan requests more closely," he says. "Practice maintenance, the level of medical care offered, and the location will continue to be major parts of practice valuation and loan consideration."
David Lucht, president of veterinary lender Live Oak Bank in North Carolina, says so far, so good for his organization. Live Oak has been offering veterinary loans since May 2007, and the bank's business has been stronger than anticipated. But he knows everybody's going to feel the pinch in the coming months. "We're worried—like everybody else—that housing problems and banks' credit problems will cause a serious recession," Lucht says.
While the housing crunch has led mostly to devaluation of residential properties, there's also some volatility in commercial real estate, including property owned by veterinary practices. Volatility may lead some current owners to hold off on selling. "Ten percent less for a seller usually won't end a sale," Lucht says. "But if the real estate is going to be dramatically devalued, it might just be an excuse for an owner who loves the job to keep practicing."
The underlying question in all of this is whether financially pained consumers will keep spending money for pet healthcare. Historically, they have, even in deep recessions. Many Americans' most treasured bond outside their family is with their pet. And the profession is built on keeping those trusted friends as healthy and happy as possible. It's a business that doesn't go out of style.