When it comes to growing a business, we’re debunking the myths around debt for your healthcare practice. Popular opinion may state that debt is to be avoided at all costs in your business. But we believe that, if managed properly, debt can enable you to increase your assets and strengthen your cash flow. Debt may have even rescued some of the med spas who suffered from the COVID-19 pandemic economic decline:
In 2020, 10.6% of respondents to a survey said they had to permanently close their medical aesthetics practice in 2020. 18.4% permanently laid off employees due to the pandemic. 30.3% of respondents saw their medical spa’s 2020 revenue decrease by more than 10% compared to their 2019 revenue. Only 11.8% said that COVID-19 has had no impact on their business, 32.9% said it has had a slight impact. A whopping 48.7% said it has had a moderate impact, and 6.6% said it has had a severe impact.
In regards to the small business relief loans, 52.6% of respondents received a Paycheck Protection Program (PPP) loan, while 9.2% received an Economic Injury Disaster Loan (EIDL). A further 17.1% say they received both loans, and 21.1% didn’t receive either.
Read on for how to leverage debt for your healthcare practice and the requirements needed to obtain debt from a lender.
Understand the Pros of Leveraging Debt for Your Healthcare Practice
Your healthcare practice can welcome increased capital, stronger cash flow, and reduce existing debt that ultimately generates more revenue! Below are some of the benefits of obtaining or refinancing a loan for your business.
- To start, grow, or expand your healthcare practice. With debt, you can have access to the funds needed to start your new business. If you are purchasing a new space, you can fund buildout, inventory, and other operational start-up needs. Alternatively, you can grow your practice by purchasing the equipment needed to expand your service mix or building out more rooms to hire additional providers and receive more patients. Finally, funds allow you to scale your business without acquiring another practice or de novo. Need to add or build out your business to accommodate a new partner? You can structure your partnership agreement to share the debt, thus splitting the risk.
- To consolidate and refinance existing debt. If you have multiple significant loan and credit payments each money, refinancing can simplify your debt. If you are left with minimal or negative cash after making your monthly debt payments, refinancing may lessen your payments. Or, perhaps the terms for your loan are too aggressive to maintain–with short payment terms and large monthly payments. Getting a new loan to pay off your original loan can come with better terms and a lower APR.
- Equity is expensive. Your business may be worth a considerable amount over time, and giving up equity for access to capital could pose future challenges and risks to your business. When you opt for debt over equity, the lender gets no ownership claim or control over your business.
- Interest on the loan is a deductible expense on your business taxes and financing costs are a relatively fixed expense.
- Strengthens your cash flow. Having available credit or access to a Line of Credit (LOC) gives you flexibility and additional funds to make operational purchases. It also allows for extra business support in terms of need–like a global pandemic!
Good Versus Bad Debt for Your Healthcare Practice
Good debt has several key features to look for that will help to grow your healthcare practice. Identifying these traits will also protect you from bad debt, which can leave you deeper in the hole. Good debt typically has a lower interest rate. The payment terms will offer smaller amounts over longer terms. Small business loans are designed to allow businesses the ability to increase margins or revenue through funding operations or space. Additionally, a mortgage should allow you to build equity, generate revenue from rent, and can increase in value over time.
Contrarily, bad debt may have high-interest rates and is not backed by value-increasing assets. It may pose short payment terms–large payments over a short period of time. It offers debt to cover other debt when you do not have the cash flow to either old or new debt. And cash loans and revenue advances come with high-interest rates.
How to Choose a Lender
You should select a bank or lender that offers the type of loan or credit you are looking for. Traditional savings and loan banks, commercial banks, and credit unions are good options for small business loans, credit cards, and LOCs. Government-sponsored debt programs like the Small Business Administration (SBA) provide small business loans with competitive interest rates and can provide additional relief options if entering bankruptcy. Finally, commercial finance companies may be leveraged for equipment purchases or inventory.
Requirements Needed to Obtain Debt for Your Healthcare Practice
A lender will look for several green flags at your business. If you are a start-up, you will need an 18-month to two-year pro forma. A pro forma is a projection of the business income and expense budget. It demonstrates cash flow within the practice to show the lender your business will be able to afford the loan. You will also likely need to present your debt service coverage ratio (DSCR), three years of personal tax returns, a personal financial statement, and a business plan.
If you are refinancing a loan for your business, you will need to show two to three years of business tax returns, two to three years of personal tax returns, two to three years of financial statements (i.e. profit and loss and balance sheets), and your DSCR.
The debt service coverage ratio measures your business’s available cash flow and whether you have enough income to cover your debts. A DSCR of 1 or above indicates a business has sufficient income to cover its debt. A DSCR of 2 or higher is ideal and suggests the business is capable of taking on more debt. Banks will look for a DSCR of 1.2 or higher before lending.
Short and Long Term Debt Management
What if you do need to reduce debt? If your business is overwhelmed by debt payments, there are active steps you can take to lessen the load. First, understand your overhead and create a cash flowcharting your anticipated revenue, total expenses, and any loan or credit payments. Second, review expenses and discern excess spending like meals, travel, unnecessary office or clinical supply inventory, and advertising with low return on investment. Third, prioritize urgent bills. Fourth, negotiate with any vendors or creditors on payments–can you skip, pause, or reduce your rate? Fifth, consider consolidating and refinancing existing debt. Lastly, get a business financial consultant or advisor who can help.
You can also manage your debt by planning your cash flow. Start by creating a budget and cash flow that maps out the next 12 months of your business. Then anticipate revenue (collections), plan your expenses (rent, marketing, payroll, supplies, etc.), and include monthly debt payment totals in your cash flow. Finally, consider any debt to refinance or consolidate for better interest rates and terms.
Skytale Group can help you tackle strategic financial decisions, set goals, and create a map to get you where you want to go–including obtaining capital through debt! Contact us today to discuss how we can help you grow your healthcare practice.