SBA-backed loans offer aid for cash-strapped doctors

When it came time to figure out how to get a shot of cash to help his practice, Xiaowen Wu, MD, a solo family physician in Alpharetta, Ga., did what more and more doctors are doing: He sought a loan backed by the Small Business Administration.

Dr. Wu represents one of 1,175 practices that took out $256.3 million in SBA-backed loans in the government's fiscal year 2005, up from 1,073 loans for $219.5 million in 2004, which was up from 964 loans for $166.2 million in 2003, according to data supplied by the SBA. That's not counting practices who used SBA-backed loans to open imaging centers, specialty hospitals, ambulatory surgery centers or other ancillary facilities.

It's easy to see why SBA-backed loans would gain in popularity. Depending on the lender, a physician could put no money down and offer little collateral, yet still walk away with enough money to not only, say, build a new office, but also to fill it with equipment and furniture, and have enough working capital to get through the first few cash-strapped months. And unlike more traditional lending services, all these purposes can be satisfied with one loan, one application and one monthly payment.

Dr. Wu said his $275,000 loan is the extra juice that will allow him to leave his rented office for a new facility, as well as stock it with state-of-the-art equipment.

"The major advantage of SBA is, you get the loan," said Matthew Parker, vice president of commercial finance for Coffman Capital in Oldsmar, Fla., which handles SBA loans for doctors. "It's getting what you want. Because most lenders, if they don't have the SBA guarantee, won't give you what you want."

Getting what you want does come at a price. An SBA-backed loan can have higher interest rates, higher fees and more hassles than a traditional loan. Also, the SBA requires that if you have collateral, you have to offer it up -- you'll likely have to put up whatever equity you have in your house to protect the loan.

Then again, the interest is capped at prime plus 2.5%, and SBA loans are meant for physicians who are making major shifts in their lives -- such as just coming out of residency, or launching a major expansion of their practice -- and couldn't otherwise get the money to pay for them.

"It's a poor man's program," Parker said. "It's meant for people who don't have a whole bunch of stuff to tie up."

SBA-backed loans aren't for everyone. "An established physician who's been practicing for five or more years would probably not be interested -- they're better off with other options," said Jeff Russell, president of Las Vegas-based Oakridge Healthcare, a practice financing company. "But if you're new and want to get into practice, this is a good way of doing it."

The SBA doesn't actually give the loans. Instead, banks and other lenders sign up to lend under the protection of SBA, which guarantees 75% of the loan. Thus, banks are willing to lend to riskier creditors. The turning of the century has brought increased activity in loans. In 2001, 37,528 loans worth $8.6 billion were backed. In 2005, the number of loans had more than doubled in four years, to 88,912. That represented a record $14 billion in loan value, said Michael Stamler, the SBA's chief spokesman.

Congress sets a cap for the total number of loans backed. That cap for 2006 is $17.5 billion, but Stamler said while loan activity is expected to be up, the SBA doesn't expect it to push the edges of the cap.

Meanwhile, the number of banks with fewer than $500 million in assets dropped in the same period from 8,647 to 7,208. Thus, the friendly neighborhood banker, ready to trust you with a handshake, has faded away, leaving big banks using credit-scoring technology for their yea-or-nay answer because they can afford to, and small banks doing the same because they can't afford not to.

SBA reports note that consolidation in the banking industry has helped push its numbers up. In June 1997, the assets held by the top 500 bank holding companies represented 52% of all banking assets. In June 2002, that percentage had shot up to 70%.

The SBA guarantee offers options, and not all terms will be the same with each lender. Some will require a 10% cash advance or down payment on any loan, while some might want more. The length of the loan can vary. So can the interest rate, even though it's capped.

The physician also has to look at whether he or she is going to need a 7(a) loan, which covers most general uses, or a 504 loan, which is used only for equipment.

In addition, a physician has to know whether his or her lender is a preferred lender that can approve the loan in-house. Lenders without that status have to have their loans processed and approved directly by the SBA, adding to a closing process that can take three to four weeks.

Meanwhile, events in Washington, D.C., have some experts saying that if you want an SBA loan, now is a good time to get started. The Bush administration has frequently called for cuts in the program, including reducing the federal repayment guarantee to 50%, a move that experts say would push a lot of lenders out of the business. Congress has consistently fought -- successfully -- against those cuts.

Whatever you do, experts say, physicians should check out any lender thoroughly and have a business plan ready to show a potential lender.

What is one of the best ways to make the right decision?

"Consult your peers," Coffman Capital's Parker said.