Federal Loans For Medical & Dental Practices
2008-03-11 02:37:13SBA LOANS FOR MEDICAL AND DENTAL PRACTICES
by Justin F. McInerny, Esq.
INTRODUCTION TO THE SMALL BUSINESS ADMINISTRATION
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The Small Business Administration (SBA) was created by Congress in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns. The SBA's stated mission is to help Americans start, build and grow businesses. The SBA provides many services to all kinds of entrepreneurs including marketing advice, business planning advice and most importantly for the purposes of this newsletter - loan programs. Note that the SBA is not a lender or a bank and hence the SBA never technically directly works with the borrower. Nevertheless, the SBA and its rules are the most important piece of these lending puzzles.
SBA 7(a) LOAN PROGRAM - WORKING CAPITAL
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The SBA's two most popular loan programs are known as the 7(a) program and the 504 programs. Both of these programs are particularly helpful to medical businesses. The 7(a) program is probably the most popular SBA loan program. A 7(a) loan is largely intended to provide working capital for a business and does not require the business to have collateral. The fact that no collateral is required from the business is a great advantage to medical, dental and medical related businesses, because most medical businesses, especially medical and dental practitioners and retailers, lease office or retail space and therefore have very little, if any collateral.
Note that the SBA itself does not actually lend the money. Rather the loan comes from a lending institution such as a bank. However, the SBA helps the loan get approved because the SBA will repay the lender much of the loan if the borrower defaults on the loan. In other words, if the borrower defaults, the lender can count on getting at least a portion of the loan paid off by the SBA. Therefore, the lender can handle the loan in much the same way any other loan would be handled. Bear in mind that both the lender and borrower have to go comply with certain SBA mandated requirements which are slightly different, and perhaps more cumbersome, than the requirements of other types of loans.
All of this applies to any applicant whether or not the business involves medicine. What makes medical and dental businesses especially attractive to the SBA is that medical businesses tend to have everything, other than collateral, that a lender looks for in a business. In a nutshell, lenders want to be sure the loan will be repaid. Lenders to a large degree are not interested in collateral because lenders do not want to own the borrower’s collateral. Lenders simply want to be repaid timely and with interest. Think about it, lenders are simply renting money to medical practices. As long as the lender gets its “rent” payment every month, the lender is happy. This brings me back to my point about medical and dental practices. That is, they tend to have a very predictable source and stream of revenue, i.e. “cash flow” which is oftentimes reliably paid by insurance, Medicare and so on. It is the cash flow, which pays the loan. The cash flow in most medical businesses, since the bulk of it tends to come from insurers, can be easily documented.
FIRST THINGS FIRST - CHECK YOUR ELIGIBILITY
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Before you start your application process, see if you and your practice are eligible for an SBA 7(a) loan in the first place. In most instances, medical, dental and medical related businesses are eligible for SBA loans but it does not hurt to double check. Therefore, please consider the following eligibility requirements before you start the loan application process.
Business Size limits according to sector:
Your SBA 7(a) loan request will be considered ineligible if, among other things you intend to use proceeds to:
There are at least nineteen business types, which are ineligible for any SBA loans; most of these have no relation to medical businesses. You can see a full list of excluded business types at the SBA website but some examples of excluded businesses include:
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The 504 programs differs from the 7(a) program in that 504 loans are made so that the business can acquire tangible assets with long term depreciation, i.e. land, buildings and equipment. These are things which can easily pledged as collateral. Because they can be collateralized, the loans are easier to obtain. Simply stated, these loans are terrific if when you want to buying your own office, retail space, distribution facility or manufacturing facility.
Like the 7(a) loans, the 504 loans are not unique to medical businesses. However, medical businesses are highly desirable to SBA lenders for the reasons stated above.
Specifically the loans can be used for the following purposes:
Size requirements in 504 loans:
The business type exclusions for 504 loans are the same for 7(a) loans as stated above.
PERSONAL QUALIFICATIONS FOR BOTH 7(a) and 504 loans.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Assuming your medical, dental and medical related business meets the criteria described above, then you will still have to be personally qualified. A lot of variables are considered by lenders. First of all, the SBA's stated policy is only to lend to people of good character. Additionally, as with any loan, lenders want to lend to people with solid credit scores. Also, lenders want to lend to people who are experienced in the business, which they intend to purchase. For example, if you are a pharmacy owner/operator and you want to buy a medical device distributor then the lender is less likely to fund the loan than if you were trying to buy another pharmacy.
Before you make an appointment with a lender, I suggest that you thoroughly prepare for the loan application. Therefore, you should obtain a current credit report, have a current CV (preferably no longer than two pages), and have a business plan and a complete business and personal financial statements. If you give these things to the loan officer at your first meeting you will be ahead of most loan applicants.
CONCLUSION
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SBA loans are one of the many ways to help you finance the acquisition and/or expansion of your medical or dental practice. To keep this newsletter brief, I purposely omitted a lot of important details, which must be considered when looking for SBA funding. This article is meant as a basic introduction to the process. I strongly encourage you to do a lot of independent research on this topic as well as to consult with an experienced SBA loan officer.
--------------------------------------------------------------------------------------------------------------------------------------------
Justin McInerny is an attorney by training and a business acquisition consultant with Beltway Business Brokerage. He is based in Beltsville, Maryland near Washington, DC where he provides consulting and legal services for all manner of business acquisitions.
Contacts
jmcinerny@beltwaybrokerage.com
(301) 943-5332
by Justin F. McInerny, Esq.
INTRODUCTION TO THE SMALL BUSINESS ADMINISTRATION
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The Small Business Administration (SBA) was created by Congress in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns. The SBA's stated mission is to help Americans start, build and grow businesses. The SBA provides many services to all kinds of entrepreneurs including marketing advice, business planning advice and most importantly for the purposes of this newsletter - loan programs. Note that the SBA is not a lender or a bank and hence the SBA never technically directly works with the borrower. Nevertheless, the SBA and its rules are the most important piece of these lending puzzles.
SBA 7(a) LOAN PROGRAM - WORKING CAPITAL
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The SBA's two most popular loan programs are known as the 7(a) program and the 504 programs. Both of these programs are particularly helpful to medical businesses. The 7(a) program is probably the most popular SBA loan program. A 7(a) loan is largely intended to provide working capital for a business and does not require the business to have collateral. The fact that no collateral is required from the business is a great advantage to medical, dental and medical related businesses, because most medical businesses, especially medical and dental practitioners and retailers, lease office or retail space and therefore have very little, if any collateral.
Note that the SBA itself does not actually lend the money. Rather the loan comes from a lending institution such as a bank. However, the SBA helps the loan get approved because the SBA will repay the lender much of the loan if the borrower defaults on the loan. In other words, if the borrower defaults, the lender can count on getting at least a portion of the loan paid off by the SBA. Therefore, the lender can handle the loan in much the same way any other loan would be handled. Bear in mind that both the lender and borrower have to go comply with certain SBA mandated requirements which are slightly different, and perhaps more cumbersome, than the requirements of other types of loans.
All of this applies to any applicant whether or not the business involves medicine. What makes medical and dental businesses especially attractive to the SBA is that medical businesses tend to have everything, other than collateral, that a lender looks for in a business. In a nutshell, lenders want to be sure the loan will be repaid. Lenders to a large degree are not interested in collateral because lenders do not want to own the borrower’s collateral. Lenders simply want to be repaid timely and with interest. Think about it, lenders are simply renting money to medical practices. As long as the lender gets its “rent” payment every month, the lender is happy. This brings me back to my point about medical and dental practices. That is, they tend to have a very predictable source and stream of revenue, i.e. “cash flow” which is oftentimes reliably paid by insurance, Medicare and so on. It is the cash flow, which pays the loan. The cash flow in most medical businesses, since the bulk of it tends to come from insurers, can be easily documented.
FIRST THINGS FIRST - CHECK YOUR ELIGIBILITY
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Before you start your application process, see if you and your practice are eligible for an SBA 7(a) loan in the first place. In most instances, medical, dental and medical related businesses are eligible for SBA loans but it does not hurt to double check. Therefore, please consider the following eligibility requirements before you start the loan application process.
Business Size limits according to sector:
- Manufacturing, e.g. medical device maker : Up to 500 employees,
- Wholesaling, e.g. pharmaceutical distributor: Up to 100 employees,
- Services, e.g. family medicine medical and dental practice: Annual sales up to $7 million, and
- Retailing, e.g. pharmacy: Annual sales up to $21.5 million.
Your SBA 7(a) loan request will be considered ineligible if, among other things you intend to use proceeds to:
- Provide funds for speculation
- Purchase real estate to be primarily held for sale or investment
- Pay delinquent state and federal taxes
There are at least nineteen business types, which are ineligible for any SBA loans; most of these have no relation to medical businesses. You can see a full list of excluded business types at the SBA website but some examples of excluded businesses include:
- Non-profits, e.g. a medical and dental clinic providing charitable services, and
- Schools with religious affiliations
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The 504 programs differs from the 7(a) program in that 504 loans are made so that the business can acquire tangible assets with long term depreciation, i.e. land, buildings and equipment. These are things which can easily pledged as collateral. Because they can be collateralized, the loans are easier to obtain. Simply stated, these loans are terrific if when you want to buying your own office, retail space, distribution facility or manufacturing facility.
Like the 7(a) loans, the 504 loans are not unique to medical businesses. However, medical businesses are highly desirable to SBA lenders for the reasons stated above.
Specifically the loans can be used for the following purposes:
- Acquisition of land,
- Land improvements,
- Acquisition of an existing building,
- Long term leasehold Improvements, and
- Acquisition of Machinery and Equipment.
Size requirements in 504 loans:
- Current net worth of less than $7,500,000.00, and
- After tax profits less than $2,500,000.00 averaged over the past two years.
The business type exclusions for 504 loans are the same for 7(a) loans as stated above.
PERSONAL QUALIFICATIONS FOR BOTH 7(a) and 504 loans.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Assuming your medical, dental and medical related business meets the criteria described above, then you will still have to be personally qualified. A lot of variables are considered by lenders. First of all, the SBA's stated policy is only to lend to people of good character. Additionally, as with any loan, lenders want to lend to people with solid credit scores. Also, lenders want to lend to people who are experienced in the business, which they intend to purchase. For example, if you are a pharmacy owner/operator and you want to buy a medical device distributor then the lender is less likely to fund the loan than if you were trying to buy another pharmacy.
Before you make an appointment with a lender, I suggest that you thoroughly prepare for the loan application. Therefore, you should obtain a current credit report, have a current CV (preferably no longer than two pages), and have a business plan and a complete business and personal financial statements. If you give these things to the loan officer at your first meeting you will be ahead of most loan applicants.
CONCLUSION
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SBA loans are one of the many ways to help you finance the acquisition and/or expansion of your medical or dental practice. To keep this newsletter brief, I purposely omitted a lot of important details, which must be considered when looking for SBA funding. This article is meant as a basic introduction to the process. I strongly encourage you to do a lot of independent research on this topic as well as to consult with an experienced SBA loan officer.
--------------------------------------------------------------------------------------------------------------------------------------------
Justin McInerny is an attorney by training and a business acquisition consultant with Beltway Business Brokerage. He is based in Beltsville, Maryland near Washington, DC where he provides consulting and legal services for all manner of business acquisitions.
Contacts
jmcinerny@beltwaybrokerage.com
(301) 943-5332
