While today’s economic environment is certainly challenging, there are still a number of financing options available to optometrists.  Whether you’re purchasing an existing practice or starting up a practice in a lease space, you most likely need financing that gives you maximum flexibility and resources to meet your immediate needs and ensure long-term success. 

But prior to starting the loan process, you’ll want to understand the advantages of owning your business property versus leasing, the financing options available to you and the questions you’ll be expected to answer by the lender.

5 Reasons You Should Own Your Business Property

There are five important reasons for owning the property where your practice is located:

  1. Property values have become more reasonable.  Recent studies have shown that commercial property values have fallen significantly since their peak. Whether you buy land or a building, the market downturn could mean some great bargains – and more practice for your investment.

  2. Preferential tax treatment. Commercial mortgages experience the same tax advantages as residential mortgages – you can deduct 100% of the mortgage interest right off the top of your business income. In addition, you can write off depreciation expenses for the office building. And later, you can take advantage of the 1031 Exchange, an IRS rule that allows the seller of a commercial property to use the proceeds of the sale to buy other like property without paying capital gains taxes. This means you can move to a larger location as your practice grows, or buy an investment with no tax penalties.

  3. Long-Term Appreciation. History has shown that real estate – whether commercial or residential – appreciates over time, and this will continue over the long run despite the current crisis in the residential housing market. When you own both your practice and the underlying commercial real estate, you’re actually making two investments in one – in the value and good will of your practice, and in the long-term appreciation of your real estate property. Together they provide more options as you approach retirement.

  4. Retirement Funding. When it comes time to retire, many doctors choose to sell both the practice and the real estate, investing their cash profits in a fund to finance their retirement. Others sell the practice but keep the real estate, with the new practice owner paying rent and providing ongoing monthly income. The point is, you have options based on your financial needs.

  5. Favorable Rates. Rates are at historic lows for both commercial and residential real estate. Today it’s not uncommon for a monthly payment on a 25-year commercial mortgage to be the same or lower than rental payments for a similar space. In addition, only 10% down payment is required when you borrow money under the SBA loan program.

Working with a Specialty Finance Company

Loan options are based on the type of project you pursue.  If you are purchasing or starting a practice, your loan is considered Practice Financing and is typically best serviced by a specialty finance company.

Specialty lender practice loans are designed specifically to meet the cash-flow needs of vision care practices. Since these lenders have a unique understanding of your business, they typically have products to meet the ever-changing needs of their clients including start-up and practice acquisition loans, debt consolidation and equipment loans. Specialty lenders create their loan terms and structures to specifically address your practice needs.

These specialized teams will help facilitate your finance requests, guide you through the financing process and prepare your application package for underwriting.

The advantages of using a specialty finance company are as follows:

  • Minimal paperwork and quick turn-around
  • Flexible and customized repayment plans
  • Up to 100% financing options available
  • Personal collateral is typically not required to secure financing
  • Working with a team of professionals that understands your business

Specialty Finance Company loans differ from local bank or SBA loans in the following ways:

  • Conventional loans through a local or regional bank can require a larger down payment.
  • Conventional loans can be based on existing assets rather than future performance, making it difficult for new business start-ups to obtain financing.
  • There may be limited creative repayment options for borrowers with special circumstances.
  • Specialty lenders typically offer different loans for each aspect of your practice instead of one brand of loan for every request.

Using a specialized health care lender for your practice acquisition, start-up or expansion saves you both time and money. Unlike most local banks, a specialized lender can combine your practice, equipment or property purchases into one loan package, providing a streamlined process with one credit application, one set of fees and one closing. A specialized lender can also provide a broader range of loan options, from short-term fixed rate loans to low variable rate mortgages.

SBA Loans

SBA Practice/Commercial Real Estate loans are term loans obtained through a bank or commercial lending institution and guaranteed by the Small Business Administration.

SBA practice loans are typically financed over seven to ten years, with SBA lenders offering 85% to 90% financing.  The loan typically commands a 2% to 4% SBA guaranty fee and other closing costs, most of which can be financed into the loan.  However, as part of the 2009 Economic Stimulus Package signed by the President, many of these fees now have been temporarily reduced or even eliminated for certain loan programs, making SBA financing even more attractive.

SBA Practice loans offer some key advantages over conventional practice loans:

  • A lower variable rate option
  • No prepayment penalties
  • More flexible credit underwriting guidelines

But SBA practice loans also have their limitations:

  • SBA loans almost always require at least a 10% down payment.
  • The loan fees and closing costs traditionally range from 2-4% depending on the size of the loan. However, due to the 2009 Economic Stimulus Plan, many of these fees have been temporarily waived.
  • The loan program may require personal assets and property as collateral.
  • The loans typically require more paperwork.

Be Prepared for Lender Questions

To ensure the loan process goes well, be prepared to answer these five basic questions that all lenders ask potential borrowers:

  • How much money will you need?  The lender needs to know the precise amount of funding that you need for your project, which means you’ll need to do your homework in advance by obtaining estimates for your practice purchase or start-up.

  • How will you use the money you will borrow?  For a practice acquisition, be prepared to provide the negotiated purchase price plus the working capital needed.  For start-up or expansion projects, lenders will be looking for detailed costs for the project with a specific amount for working capital, equipment, construction costs, as well as a contingency fee.

  • How will you pay back your lender?  Provide a business plan with a detailed pro forma that shows your monthly cash flow and ability to make payments to the bank.

  • When can you start to make payments on your loan?  You may want to request a graduated payment plan where the size of your payment gradually increases over time as your business becomes established and grows.  Be sure you’re provided with a specific timetable showing exactly when and how much you will be paying month-by-month.

  • What will you do if you experience a revenue or income shortfall?  It’s critical to be prepared with an alternative plan.  This could either be cutting expenses, working outside your practice or tapping into working capital, lines of credit or personal savings. 

Even in a tight economic environment like we’re experiencing today, you can still obtain the funds you need to make the transition to new practice ownership. With a little homework and preparation, you’ll be well on your way to obtaining the funds that will help get your eye care practice off the ground!

Learn More!  Access a comprehensive array of resources to help you establish and grow your eye care practice. Whether you’re a recent graduate, a new practice owner, or a well-established practitioner, you’ll find valuable information, tools and contacts to help further your professional success.