Got collateral?


It pays to think through your options when you're borrowing.

Recently I helped finance a practice buy-in, and the doctor joked about putting up her firstborn as collateral. It's true; anyone lending you money wants some type of collateral. However, your firstborn won't necessarily do the trick.

Jeff Rothstein, dvm

The most common collateral is a lien on the practice's real estate. Banks prefer this because if you default, they have something tangible that's easy to sell. The business itself has less tangible value, so it's harder to find a lender who's willing to let you bank on practice value alone.

Of course, it's important to know what you're committing to. Say you need a $200,000 loan to purchase a practice. The lender notices that you have $100,000 in equity on your home. His first proposal is a lien on your house. My standard line: "Sorry, but my wife doesn't want me to mix business with our personal property." That has worked so far.

I used to not be concerned about offering liens on the real estate. I wasn't planning on defaulting, and a lien doesn't cost anything, right? Last year when I moved into a new facility, I found out otherwise. Here's how:

I want to sell the old building for $250,000, and I have the bank's lien and seller's lien on the property. For the property to be sold, the title must be free of any liens. But the practice's outstanding loans are more than $250,000, and the banks have the right not to discharge the liens until the loans are fully paid off. Getting stuck with two buildings isn't good.

Be careful about what you promise. Most of the time you can find a way to make that deal happen if you keep looking for it.

Veterinary Economics Editorial Advisory Board member Dr. Jeff Rothstein is president of The Progressive Pet Animal Hospitals and Management Group in Michigan.

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