Survive the credit crisis by keeping on top of finances

If you've counted on loans or lines of credit to get you through a tough financial time or a practice expansion in the past, you might not be able to count on that kind of help for the time being.

Even before the recent market meltdown that saw banks draw back so much that they refused to lend to each other, some numbers showed that credit wasn't easy to get.

About 60% of domestic banks reported tightened lending standards on commercial and industrial loans, according to a July Federal Reserve survey of senior loan officers.

A 2008 National Small Business Assn. survey of small- and medium-sized businesses found that 55% of respondents had a harder time securing credit than in the previous year, and 35% of companies with four or fewer employees couldn't get the financing they needed.

The NSBA survey also found that 54% of small businesses had taken out some type of business loan, and 44% had used credit cards in the past 12 months to help finance their capital needs.

"It's no question, banks are controlling the credit now. It's hard to shop banks for the best credit like you used to," said Shawn M. Frier, treasurer of the New York Medical Group Management Assn. Board of Directors and director of Freed Maxick & Battaglia, health care certified financial planners in Buffalo, N.Y.

Frier said medical groups that have had troubles with debt in the past will have problems borrowing in the near future.

But even groups with good credit histories could find themselves out in the cold.

Doug Gordon, principal with Gordon & Associates in Cordova, Tenn., and a member of the National CPA Health Care Advisors Assn. said he had a medical group client that was unable to get a line of credit renewed, even though the loan was just one year old, the group's income and credit were good, and the lender was a bank that is doing fairly well. "The bank said it was tightening up its credit. It determined the medical group had borrowed on another line of credit from another source and was afraid the group would become overextended, leaving the bank stuck out in the cold."

Some practices that have enjoyed a healthy business in the past may have to rethink expansion plans, Gordon said. "If you're an oncologist or neurologist and people still need to see you, I would say go ahead and try to expand. But if you're a plastic surgeon or allergist -- and patients are seeing you for non-life-threatening reasons -- I would hold off. People are beginning to draw back from these visits," he said.

Although it has become more difficult to obtain loans, health care advisers and other experts say it is not impossible. They say physicians in particular are still good credit risks for banks, based on their income and the fact that they traditionally pay their debts. Plus, they have the advantage of a brick-and-mortar asset -- their practice's building -- which gives them additional leverage with banks, said Mary Brogan, the NSBA's vice president for public affairs.

Experts say there are several steps physicians can take to make their practices appear more creditworthy to even the most skittish bankers.

• Monitor cash receivables. Now more than ever, physicians need to have a billing and collection system in place so they can stay on top of accounts receivables and private-pay patients, advises Josh Teplitzky, an associate with the accountancy firm Teplitzky & Co. in Woodbridge, Conn. Teplitzky said banks will want to see most receivables coming in during the first 30 days, and fewer in a 90-day time frame. Frier added that physicians should become more involved in the billing and collection process, and not just leave that part of the business to paid employees.
• Anticipate future cash needs before money gets too tight. "Now is the time to be proactive. You'll need a contingency plan, especially for the beginning of the year when revenue trickles in for many practices," Frier said. If you plan to expand or anticipate a cash-flow crunch, advisers recommend that you set up or renew a line of credit, even if you don't need it, and bank some of the money at another financial institution, where you'll get minimal interest. Teplitzky said it will cost you about $3,000 in interest after taxes if you take out a $150,000 line of credit and bank $50,000. However, "it will give you peace of mind that $100,000 is available to you if you need it, and it is less likely the bank will pull your line of credit if some of it is being used."
• Maintain healthy balance sheets. Control spending and pay down debt as quickly as possible.
• Make sure you are in compliance with any covenants attached to your line of credit. Some banks may require that a practice maintain adequate capital or have no other debt, or that a physician owner won't increase his or her salary, during the life of the credit line, Gordon said.
• Work with your banker. Brogan said that if you have worked with one bank for a long time, let the banker know your intentions and ask for advice in securing a loan. She said physicians are more likely to get a character loan at a community bank. Robert C. Seiwert, senior vice president for commercial lending and business banking at the American Bankers Assn., added that physicians should tell their banks how their business is weathering today's economic storm, and ask for feedback on any proposed business plans.
• Know your banker. Seiwert said not all banks specialize in lending to businesses. Even those that do lend won't always do start-up loans, and some only lend to firms in certain industries. Don't waste a banker's time, or your own, by going to a lender who won't help you.
• Think like a banker. Seiwert said business owners should have a plan for mitigating potenial risks and share it with their banker. He said it's important for banks to know that you realize the risks you face and are prepared to deal with them.
• Develop a plan that allows for two ways to repay any outstanding loans your practice may have. Bankers look for a primary source of repayment (cash flow from the business) and a secondary source (sale of an asset, or a loan from a third party). Seiwert said physicians need to think about repayment before they get a loan, not after they can't pay it back.