5 mistakes doctors make when borrowing money

As new medical technology emerges every year and medical practices adapt to new demands, medical practice borrowing is on the rise.

By — Posted April 9, 2012

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When physicians need to borrow money for new equipment or real estate or even to buy out a practice partner, most of the time bank approval is the easy part.

Experts say physicians run into trouble not in qualifying for loans, but in shopping for the best terms and the best service, and paying attention to the details associated with borrowing. Those details — whose name is on a loan, what is listed as collateral, whether a repayment schedule is based on realistic assumptions — ­can prove crucial to a practice’s success.

Borrowing is increasingly common for medical practices. Loans to medical practices backed by the Federal Small Business Administration have been rising steadily during the past decade. In 2011, the SBA backed $649.8 million in 1,516 approved loans to physicians, more than four times the amount of borrowed money it guaranteed in the 625 SBA loans approved in 2001, according to SBA data. But some physicians continue to borrow in ways that end up backfiring or, at a minimum, keeping their practices from fully benefiting from the capital.

“I believe that the reason that physicians have difficulty in borrowing money is that they don’t know how. That really is the crux of the matter,” said David Shuffler, a longtime banker who has arranged hundreds of medical practice loans and now works as a consultant based in Asheville, N.C., providing practice valuations. Most physicians have no reason to learn the ins and outs of banking, so their mistakes are understandable, he said. But that doesn’t mean they are unavoidable.

Experts differ on which are the most common mistakes and which are most important to avoid, but the most common fall into some broad categories:

1. Failing to shop for a banker

Although it might seem as if banks constantly merge and only a few remain, there are many choices available to most physicians. Too many doctors, Shuffler said, go to the nearest bank for a loan without shopping around.

“Doctors need to interview banks, which is kind of a foreign concept sometimes,” he said. He advised talking to least three banks.

The first meeting should be like a “first date,” he said. “If the doctor can walk out with the feeling that this banker can be a partner, then they can do business and go to the next step.”

Dave Kaneda, vice president and regional sales manager for Wells Fargo Small Business Administration Lending, said he thinks most doctors do shop around, but he agreed that the choice of a banker is possibly the most important part of the process.

Physicians have an edge, Kaneda said, because banks want to lend to them. “Everybody wants to earn doctors’ business, not just the loan, but the ancillary business. We want to give a doctor a loan, but we hope the doctor also brings his or her deposits to Wells Fargo. That’s the reason why this is going to be highly competitive.” Wells Fargo offers discounted financial services to AMA members through the organization’s Member Value Program.

Kaneda and Shuffler advised seeking out a bank with as much experience as possible lending to medical practices, and if the physician is looking to take out an SBA-guaranteed loan, the banker should have experience handling the complexities of SBA lending.

2. Using the wrong borrowing tool

Every situation calls for a different borrowing tool, but experts say some physicians assume they should use just one — a line of credit or a credit card, for example.

Physicians often assume that they have the best possible terms on their debt, said Mike LaPenna, principal at the LaPenna Healthcare Group, a health care consulting firm based in Grand Rapids, Mich. They may use lines of credit to purchase equipment when it would be wiser to pay on an installment loan or lease the equipment. Longer-term debt should be used to buy a practice or property, he said.

Physicians don’t need to be experts but should take time every two years to examine financial matters. Doctors should check if practice debt is in the best spot, where it is subject to the lowest interest rate and has appropriate terms.

“The best piece of advice I could give is to use long-term debt for long-term needs and short-term debt for short-term needs,” Kaneda said. Long-term debt is generally defined as any loan or obligation lasting more than one year.

It’s tempting to use a line of credit for everything the practice might need, because physicians often qualify for a large line of credit at low interest rates, he said. But a line of credit or a credit card should be paid off once a year, while a term loan that lasts over the expected life of that equipment makes more sense and is easier to pay off.

3. Borrowing to cover operating costs

This may be a painful truth for some physicians, but it’s a bad sign if a practice has to borrow money to make payroll or pay rent, LaPenna said.

“At the end of the year, when they are trying to cover salaries and bonuses, they have a tendency to access their line of credit, but they have to have a plan for addressing any debt,” he said.

As with any rule, there are exceptions — when a new partner has joined or when a practice just starts out, it’s not uncommon to borrow working capital to make ends meet. That kind of borrowing is “just part of the business,” LaPenna said.

But an established practice will have a hard time persuading a bank to lend a struggling business money just to carry it over to the next month or year. You might be able to borrow money under those circumstances, but it’s unwise unless the practice also is making major business changes that will prevent the cash shortfall from occurring again.

“Borrowing money to make payroll ­— ­that’s a bad sign,” said Matthew Parker, vice president of commercial lending for Coffman Capital, a health care lender based in Oldsmar, Fla. “You probably need to cut payroll, so you’ve got a choice to make.”

4. Not doing the math

No one is arguing that an electronic health record or other technology can’t promote efficiency and either save money or create income. But it’s important to do the math and make sure the shiny new technology is going to pay for itself sometime before it needs replacing. Or, if a physician borrows to purchase a new diagnostic or therapeutic device, the practice should figure out exactly how much income it will generate.

“It’s got to be reliable, not just based on a pig in a poke,” Parker said.

LaPenna said it’s not enough to rely on meaningful use incentives, for example, if a practice is planning to invest in a new EHR system. There must be an offset for the cost of buying equipment, either in new revenue or money saved, not just a vague idea of gained efficiency, he said.

In Kaneda’s experience, physicians are more likely to be too conservative in borrowing and don’t expect a piece of equipment will save money.

5. Failing on financing paperwork

If a physician leaves a practice, that doctor should make sure he or she is not going to be liable if the practice defaults on a loan.

“Some debt instruments offered by the bank hold the physician to a level of responsibility for repayment that is way overboard,” LaPenna said.

Most lenders require a personal guarantee for a small practice loan, so physicians should be prepared for that. But they also need to protect themselves if the practice is restructured or one or more partners leave, Kaneda said.

It’s normal for loan terms to include a “joint and several” clause, which makes each practice partner individually liable for a loan in the case of a default, Parker said. The mistake is assuming that leaving the practice means you’re also free of that liability.

LaPenna said doctors should pay close attention to whose name is on the paperwork. As with the rest of the process, the fine print is key.

“We find this to be an arena where physicians are naïve in some respects as businesspeople and then they are casual in some respects,” he said.

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Find business and lending advice online

There are many resources on the Internet that steer physicians to the best ways to find financial assistance.

American Medical Association

As part of its member value program, the AMA has negotiated member discounts and pricing for Small Business Administration loans, equipment and practice financing through Wells Fargo. For more information, select “AMA Member Value Program” at the membership benefits website (link).

Small Business Administration

The federal agency offers several types of lending to small businesses, including medical practices (link).


Retired executives provide free mentoring to small-business owners. SCORE has chapters around the country and is funded partially by the SBA (link).

The Better Business Bureau

The BBB offers an online guide to managing credit (link).

SME Toolkit

IBM and the International Finance Corp., the private arm of the World Bank, offer free advice and tools for small businesses through their Small and Medium Enterprise Toolkit, aimed at helping minority and women-owned businesses in particular (link).

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Expert advice on the loan process

Experts on medical lending offer their most urgent cautionary suggestions to physicians, finishing a sentence that starts, “Whatever you do ...”:

“Don’t lie on your application. Don’t think if there is something in the past a bank isn’t going to find out about it. Be honest about everything you put into your application.”
— Dave Kaneda, vice president and regional sales manager, Wells Fargo SBA Lending

“If you’re going to go to a bank, your goal should be to establish a partnership relationship. ... There’s a world of difference between a transactional relationship and a sustainable, ongoing relationship.”
— David Shuffler, CEO, the Practice Valuation Group, Asheville, N.C.

“Do not forget to shop rates on a regular basis.”
— Mike LaPenna, principal at the LaPenna Healthcare Group

“Don’t ever pay an up-front fee unless it’s the fully refundable SBA packaging fee. Consultants charging fees up front often don’t have the resources to come through.”
— Matthew Parker, vice president of commercial lending for Coffman Capital

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