Figuring out the financing


Your banker wants to know whether you're a good risk-and you want to know you're getting a reasonable deal. Use these tips to balance the equation.

Here's a news flash: Bankers think a lot about risk. But it's hard to blame them really. You'd want to check Joe Smith out before you cut him a check for $1 million, right? That's where a financing proposal comes in. Your proposal will help a potential lender assess the risk you pose and should cover these key areas:

  • Proposal summary. This quick introduction should include the borrower's name; address; phone number; Web address; type of practice; amount, type, and purpose of the loan sought; repayment terms and source of repayment; proposed security or collateral; and contact information for the point person concerning the proposal.
  • Management profiles. Your bank would like to know cold, hard facts about everything-including the quality of your management strategies-but in some cases the facts can be tough to come by. The next best thing: Gather the information you can. For example, you could share industry averages and other research data. And you can help support the case that you've got strong managers by giving some background about the people who own and run the practice.
  • Practice description. You want to make the lender as comfortable as possible with your practice and the great work you do. Include information on your legal structure; type of practice; products and services; practice history; current and potential growth; market description and position; trends in practice sales and net income; marketing and pricing methods; main suppliers and credit terms; number of employees; type of employees; expected employee growth through loan received; and a summary of practice goals, objectives, and challenges.
  • Specific information about the loan requested. In this section include the size of loan relative to the size of business, the intended purpose of the loan, the loan term, your repayment plan, and the collateral available.
  • Current and past practice financial statements and information about your financial future. You'll also want to talk about your debt-to-equity ratio and the practice's liquidity. Could you sell if you had to? Could you sell your assets in case of liquidation?

The bank will also want to see past and future profit trends and data that show the stability of practice profits. This is a good place to talk about your past relationship with the banker (if you've had one), your loan activity at other banks, the potential for profitable future relations with the borrower, and the size of the deposits you expect to make.

  • The practice owner's personal financial statements, including personal tax returns for three years. Among other things, this shows the rate of return the borrower earns on assets.
  • Practice tax returns for three years. Your banker will use all the data you provide to calculate the risk of default. The tax returns help build the case that you can pay back the loan, and they support the trend data you supplied about practice profits.

Gary I. Glassman, CPA

If the practice has a business plan, include it in the proposal. If you don't have a plan, at least incorporate relevant information, such as the description of the business and management.

Some lenders request that applicants complete standard loan packages, which may vary somewhat from the contents I've recommended. You won't need to fill this paperwork out until you decide to move forward with a certain lender.

With your loan proposal in hand, interview at least four potential lenders, not just your present bank. This way you can compare offers and get the best deal.

quick tip

Types of financing

There are two types of financing: conventional and SBA loans. Rates between the two types are competitive. See "Types of Financing" for a comparison. Here's more about each type.

  • Conventional financing. Usually obtained through a bank, conventional financing often requires a 20 percent down payment. In other words, the bank will loan 80 percent of the fair-market value of your project based upon an appraisal of your finished architectural drawings. Keep in mind, conventional financing usually doesn't cover soft costs. The rates can be fixed or variable and are usually based upon a common index such as prime rate, London Interbank Offered Rate (LIBOR), or the five-year/ten-year Treasury Bill rate.

The upside to conventional financing is the banks can be more flexible in their terms, and they're less costly to procure. The downside: The rates usually don't go for the full term of the loan unless they're variable. Typically rates are fixed for five to seven years, and then you'll have to refinance or re-open the rate. One key issue: If your proposal includes prepayment penalties, ask whether your lender can take them out.

  • U.S. Small Business Administration (SBA) financing. The SBA doesn't offer loans directly to borrowers; it guarantees loans. So if the borrower defaults, the SBA will buy an agreed-upon percentage of the loan balance from the lender. Law restricts the SBA to a maximum guarantee of $1.5 million; however, lenders can set higher or lower loan limits. The maximum loan amount is $2 million.

Cost Calculation

The advantage of SBA loans is that they make loans possible for those who have a down payment less than 20 percent, and they offer extended repayment periods not available under conventional financing, which makes projects more affordable. However, the loan process can be cumbersome unless you're dealing with a lender who has significant experience with SBA loans. And these loans can be difficult to restructure after they've closed.

Here's how SBA loans work: The participating lender conducts the initial interview with the borrower, forwards the loan application to the SBA, answers any questions about the proposed loan, and closes the loan. The SBA only considers loan applications from small businesses that can't obtain reasonable financing from other sources, so the lending institution must certify that it won't make the loan without an SBA guarantee.

Types of financing

SBA loans specify maximum interest rates, which are tied to The Wall Street Journal'sNew York prime rate. Depending on the loan term, interest rates on loans over $50,000 are based on the New York prime plus 2.25 percent to 2.75 percent.

Real estate and other practice assets (equipment, machinery, accounts receivable, and inventory) and personal assets (stocks and bonds) secure the loans. Borrowers are generally required to provide 30 percent to 50 percent of the company's capitalization.

The most frequently used form of SBA financing, 7(a) guaranty loans, are primarily used to provide working capital, to assist in the acquisition of equipment and other assets, and to buy property. For working capital, you can arrange a seven- to 10-year term. If you're buying machinery or equipment, real estate, or construction, the term can be as long as 25 years.

The borrower and the participating lender negotiate the terms, subject to SBA approval. However, SBA loans can't exceed the life of the assets being financed.

The SBA also offers 504 programs through which certified development companies (CDC)-private, nonprofit corporations set up to contribute to the economic development of their communities or regions-offer loans to small businesses. These 10- and 20-year loans are for acquisition of land and buildings, machinery and equipment, professional fees, and other soft costs. Here's how they work: The borrower selects a bank or financial institution that will provide 50 percent or more of the project cost secured by a first lien. The CDC provides up to 40 percent (usually up to $1 million) of the cost secured by a second lien. The borrower, who must put in a minimum of 10 percent of the project cost, can negotiate terms within these parameters with the financial institution.

The CDC interest rate is fixed, usually at a rate that's a few basis points higher than U.S. Treasury bond rates on the date the loan's secured and for the maturity selected. In addition, the borrower must pay fees of approximately 3 percent of the debenture amount; these fees may be financed through the loan.

The upside to SBA financing: They make projects happen. One key issue to consider: Once you've entered into an SBA loan, it's not easy to get out of. You'll face prepayment penalties, and any change in business structure or future borrowing usually requires approval.

While arranging financing can be intimidating and frustrating, remember this: All good things come to those who persevere. Luckily, you don't have to go through the process alone. Your accountant or financial advisor can help walk you through the maze of financing choices and questions. In the end, your up-front work will make the day you break ground come that much faster.

Veterinary Economics Editorial Advisory Board member Gary I. Glassman, CPA, is a financial consultant and partner with Burzenski and Co. PC in East Haven, Conn., and will speak on financing options at the Veterinary Economics Hospital Design Conference in August.

The bottom line

To secure the best loan, know what costs you need to cover and the loan types that will meet your needs. Then speak with at least four reputable lenders to make sure you're getting the best possible terms.

Look online

While it's tempting, you shouldn't just pick the lending institution that offers the lowest total cost. Visit our site,, and read "Choosing a Lender and Negotiating a Deal" to find out what you should consider when making this important decision.

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