Bankers need to be informed
■ A column about keeping your practice in good health
By Mike Norbut — covered practice management issues during 2002-06. Posted Sept. 26, 2005.
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Whether you're starting a new practice in town or you're well-established in your location, your relationship with your bank will play a critical role in your business success. But these days, your relationship has to be based more on data than on just a smile and a handshake.
"Literally, medicine is a business now," said Daniel E. Watkins, president of Watkins, Pagano & Associates P.A., an accounting firm based in Altamonte Springs, Fla. "Bankers are becoming so tight, they rely more on profitability and projections. If you go in stone cold and say you want a $10 million loan, you'll probably be backed up against the wall and frisked."
Physician groups need loans for any number of expenses, such as capital equipment, an investment in ancillary services, or building expansion. While some banks are starting to employ lenders who specialize in health care financing, many still do not.
It's not impossible these days to get to know your lending officer, but the foundation of the relationship is through information. It might be the gateway to favorable interest rates, better loan terms and earning the benefit of the doubt, should your practice go through some tight financial stretches.
Many banks not only are larger and more impersonal than they once were, but they also harbor a healthy skepticism when it comes to physician practices. Rising costs, including medical liability premiums in many states, and declining reimbursement rates are making profit margins razor-thin.
That makes a physician practice less of a no-brainer loan candidate now than it once did, consultants said. Banks will likely even ask for collateral or a personal guarantee on that loan.
But the practice that approaches a lender with a valid reason for needing money, documents supporting why the bank should grant the loan and a detailed plan of how the loan will be repaid will likely make a favorable impression.
"One of the places you gain a lot of credibility with your banker is through communication," said Michael McCaslin, a principal with Somerset CPAs in Indianapolis.
Doctors and bankers have to find a common language, however. Banks are accustomed to looking at common business indicators like its receivables ratio and its debt-to-equity ratio. But that information holds little meaning for a physician group.
Instead, doctors need to track the financial indicators that do have meaning, such as the size of accounts receivable, net collection ratios and the average number of days before claims are paid.
Michael Reineck, MD, an orthopedic surgeon in West Bend, Wis., and immediate past president of the Wisconsin Medical Society, said that when he was first building his practice and needed a loan, he would leverage his accounts receivable to put himself in a better bargaining position with the bank. But it took a while before he found a lender who understood the needs of a medical practice.
"I interviewed five or six bankers, and the first four were very short-sighted," Dr. Reineck said. "They did not understand the need for cash for the first six months."
Through nearly three decades of practice, Dr. Reineck has learned some of the tricks to building and preserving a good relationship with a bank. Not only did he shop around for offers, but he also has opened several other accounts with the bank which he can use as leverage when discussing a loan.
There also are advantages to staying local, even if it's a branch of a larger bank, he said. Local branches may have limits to the size of the loan they can make without involving the main branch, but as long as you can stay under that limit, you can continue to deal with that local president you've known for years, Dr. Reineck said.
Physician groups should treat a bank like a regular stakeholder as well, and be completely transparent when it comes to reporting financial information, McCaslin said.
Monthly, quarterly, or annual reports will give lenders a chance to look at trends in the key indicators. And if those trends are headed in the wrong direction, the practice can give its explanations and plan for action.
Mike Norbut covered practice management issues during 2002-06.