You’re ready to purchase a practice – but where to go for practice financing? Acquiring a healthcare practice is one of the most significant investments you’ll make in your entire career, so choosing the right lender to help you finesse this complex transaction is a critical first step in the process. The choice you make can impact the terms you receive and the quality of the entire financing process. And since your lender will be a critical member of your acquisition team, you’ll want a financial partner who will work with you to help create the business success you’re striving to achieve.

There are basically three types of lending sources to consider – local banks and lending institutions, specialized practice lenders, and practice owners willing to provide financing. All of these options have their advantages and disadvantages, so it’s important to understand the differences among them as they can impact the overall success of your transaction.

Local Bank Financing: Streamlined Process

Working with your local bank may be a good choice as they can offer many financing options and the loan process is often streamlined. You may also have established a valuable relationship with your banker.

But be aware that some local banks resist providing practice acquisition funding because they aren’t comfortable with the lack of collateral in most practices. The hard assets of a healthcare practice, consisting of equipment and supplies, typically comprise less than 50% of the practice value. The largest component of overall value consists of intangible assets, or goodwill, which are directly related to the doctor's relationships with patients and cannot be easily quantified by a lending institution.

Moreover, the average new practitioner has many thousands of dollars in student loan obligations. Taken together, the lack of collateral and weak financial position can make many bankers hesitant to offer funding. Of course, certain banks do undertake lending to purchasing doctors, particularly when a special relationship exists between a practice broker and a bank or lending officer, or when the bank has had positive experiences in completing previous practice loans.

Specialized Practice Lenders: Understanding the Market

Specialized practice lenders typically offer more flexibility, as they are willing to make loans for up to one hundred percent of the sales price of the practice, plus working capital. These loans generally carry fixed rates and can be for terms of five, seven, or ten years.

More importantly, these specialized third party lenders understand the cash flow of the practice being purchased, and make their loan decisions on that basis, not on the collateral. The doctor is usually the only signatory to most loans and they rarely require home equity as collateral. And they can offer assistance beyond financial backing, often providing custom or consolidated financing packages, business planning tools and practice building strategies to help you maximize your success. This level of support can prove significant in building the foundation you need to ensure a smooth transition to new practice ownership.

Owner Financing: Ideal for Unique Situations

Seller-financed loans can provide opportunities for practice ownership that might not be available otherwise, enabling you to get a firm footing on one of the surest paths for growing your business success. While not highly common, you may find that seller financing is available under favorable terms – for instance, when:

• The selling doctor prefers to receive his or her money over time in order to spread tax liability. (Selling doctors should discuss this option with their CPA.)
• The selling doctor perceives that receiving principal and interest payments on the loan is a good investment.
• An associate buys into a partnership. Under this scenario, the selling doctor may be the buyer’s only option as a lender, or the senior partner may prefer to lend the money to the buyer rather than allow a blanket lien to be placed on practice assets by a lender.
• A purchaser is unsuccessful in obtaining third party financing because of credit issues or the inability to obtain disability or life insurance. In this instance, owner financing may be the only option remaining.

Asking the Right Questions

When interviewing lenders for your practice acquisition financing, it’s important to ask the right questions to ascertain whether the lender can meet your particular needs. You’ll want to know that you can meet the down payment and monthly payment obligations without undue strain on your assets and cash flow. You’ll also want to understand the lender’s history in working with independent practices, and whether they can provide assistance beyond monetary support for helping you grow your business.

Be sure to find out the following:

• How much down payment will the lender require for an acquisition loan?
• Do they require a blanket lien to be placed against your practice assets?
• Do they require that your home equity be used as collateral?
• Can you be the sole signatory for the loan?
• Can the lender offer fixed-rate loans with no prepayment penalties?
• How do their rates and terms compare with competing lenders?
• What services do they offer to help support the success of your practice?
• Do they have experience with healthcare practice lending?

The Best Loan for You

Third party financing, either through a local bank or specialized lender, is the preferred method of financing in most circumstances today. Lending institutions can offer more financing options, and the loan process is often streamlined and customized to meet your particular needs. Owner-financed loans, on the other hand, can offer payment and term flexibility for practitioners who may have difficulty qualifying for a traditional third-party loan.

Just remember to do your homework and carefully identify the type of practice acquisition loan and lender relationship that works best for your particular needs. With a little research, you will no doubt make the best decision for you.