How to get credit when banks don't want to lend

Credit can be important for medical practices wanting to expand and improve technology as well as to survive dips in the revenue cycle. But it also can be hard to get.

Banks have responded to the economic downturn by tightening small business lending. But those who work on medical practice financing say it is still possible for physicians to access loans, lines of credit and other forms of capital while minimizing the risk to personal assets. Although the credit crunch is making the loan process more difficult for everyone, physicians remain attractive to lenders.

"Medical practices are doing better than other small businesses, but for the first time, doctors are beginning to find their access to credit questioned," said Marilyn Landis, founder and CEO of Basic Business Concepts Inc. in Pittsburgh, which provides financial services to small businesses, including several medical practices.

Experts say the first step to accessing credit in the current climate is to assemble more complete financial records than were previously expected. This most likely will include personal and business tax returns, as well as profit and loss statements for at least two years; individual banks may have other requirements.

"Physicians have to be prepared to demonstrate how they are handling cash flow and how they are managing getting paid," said Landis, immediate past president of the National Small Business Assn.

Physicians also need to be prepared to personally guarantee loans to their practices.

"Lenders are requiring personal guarantees when, in the past, they didn't," said Curt Rosner, a shareholder in Mallah Furman in Miami, an accounting firm that specializes in the health care industry. "The banks are often requiring mortgages on residences. They're asking the doctors for more exposure than they did in the past."

Terms, however, can be negotiated to reduce an individual doctor's risk. For example, a contract for a personally guaranteed loan for a medical group should specify that each physician only be individually liable for a portion, experts say.

"You want to spread the risk among the partners," said Jeffrey Milburn, a consultant with the Medical Group Management Assn.

Experts also advise developing a relationship with a banker and meeting with him or her regularly to discuss the practice's needs.

"Physicians need to know who their banker is and who is assigned to them," said Jeff Russell, executive director of the International Assn. for Physicians in Aesthetic Medicine and president of Oakridge Healthcare, a Florida-based financing company.

This is important to ensure the banker understands the unique qualities of medical practice financials. Unlike other businesses, many medical practices leave very little profit in the business, instead paying it out to the physicians. Also, because of the nature of insurance reimbursement, practices tend to carry high levels of accounts receivables that are more than 90 days old. In addition, physicians tend to have high levels of student debt.

"It is up to the practice manager to some extent to educate the bankers on how to analyze a practice," said Milburn. He suggests using publicly available compensation and cost data to benchmark the practice.

Hopping from bank to bank is not recommended, but experts say physicians should be prepared to walk if their needs aren't met.

"Do not be afraid to change banks if the bank does not accommodate your need for working capital and your need to grow your practice," said Robert James Cimasi, president of Health Capital Consultants.

Willingness to walk away may also serve as a strategy in negotiating interest rates and fees to get better loan terms.

"A doctor does not have to accept the first offer made by the bank," Rosner said. "It's still a two-way street. The banks still need the business of the doctors because they are still great credit risks."

Physicians, however, should be cautious about that risk, experts say, especially with business credit cards, which have become more common options as other forms of credit have become less available.

"It's a nice tool that helps you track expenses, but it's expensive if you don't pay it off. And having a couple credit cards floating around opens you up to fraud. They make me a little nervous unless they are well-managed and controlled," said Milburn.

A survey by the National Small Business Assn. found that the number of small businesses (including physician practices) using credit cards to finance their operations increased from 49% in December 2008 to 59% in April 2009, even though credit limits were being cut and interest rates increased. In addition, 57% said they received a credit card bill so close to the due date that it could not be paid on time.