The Do's and Don'ts of Financing for Medical Practices

Jack L. Caynon, III

503.243.1652

Susan S. Ford

503.243.1657

Thomas W. Stilley

503.243.1649

            Published in The Scribe, a publication of the Medical Society of Metropolitan Portland

To contend with an ever-evolving, fast-paced and often disruptive health care landscape, every medical practice, from the smallest to the largest, must understand how to obtain and use financing. However, you shouldn't try to take on this process alone when your ultimate focus is to provide excellent medical care for your patients. Instead, build a team of trusted advisers and lenders to assist you in evaluating available financing options, and explain why and when you should use a particular option in plain English. A great professional team will do much of the legwork and aid in your decision-making about which funding vehicle is right for your practice.

Build your team
The first thing to do is to hire a competent practice administrator (PA). Your PA can coordinate the financing process for your practice; however, the final decision on entering into a financing arrangement should always be made by the practice's owners, particularly when they may be required to personally guarantee any loans. The other members of your team should include a reputable accountant and a lawyer, both of whom have experience working with medical practices and their financing needs.

Financing, when to use it and how to obtain it
Financing can help your practice deal with many issues, such as a temporary disruption in cash flow caused by transition from one biller to another, or the need to cover the startup costs of a new physician. Or, your practice may need to purchase an expensive piece of equipment or fund major repairs to your facility. It is helpful to analyze these issues by considering whether the need for financing is short or long term. If the need is short term, a line of credit may be an appropriate option. A line of credit is a loan that works similarly to a credit card. A lender will agree to make funds available to the practice up to a predetermined amount. If the need is more long term, such as the purchase of equipment that can be depreciated, consider leasing the equipment instead or financing it through the equipment supplier rather than using a line of credit to purchase it. Finally, if your facility needs repair or renovation, have your lawyer negotiate these items with your landlord, or negotiate for tenant improvement allowances in your lease before you sign it, or upon renewal. When should you not use financing? In general, don't use financing to pay salaries, bonuses, or 401K contributions for your employees. Except for unanticipated temporary cash flow shortages, using credit to persistently cover a lack of revenue does not solve the problem but simply kicks the can down the road. Cash flow issues should be immediately addressed with your accountant and possibly a business consultant to prevent more serious problems from arising.

Have your team help you find the right lender
Now that you have formed your team and determined the appropriate financing vehicle, your PA should assist with winnowing the number of lender candidates down to three or so. Then, a representative group of physicians should meet each candidate to determine if the lender has the experience and temperament to work with the practice. Although the lending relationship is important to the practice's operations, always remember it is a commercial relationship, not a fiduciary one. The lender will attempt to obtain the most favorable terms for itself, while your accountants and attorneys will always seek to protect your interests first. With this in mind, you should always have legal counsel review loan documents, equipment leases, facility leases, and employment agreements to protect your legal and financial interests.

Create a budget and stick to it
Engage your PA and accounting firm to create a budget for the practice. As part of the budgeting process, you should forecast your cash flow needs to determine when and if you may need to supplement them with your line of credit. Once you have a budget, meet with your practice members to approve the budget and obtain their commitment to abide by it. Practice members should be held accountable to the budget for the practice to be successful. This is an important tool to keep your practice on the right path to financial success and to withstand unexpected events and disruptions practitioners face in today's health care arena.

Related Practice Areas