Thursday, September 3, 2015

Don't Let Loan Debt Drag Down Your Practice

medical practice and debt
Avoid Debt!
Even after you allow for a banker’s vested interest in writing capital loans, many physician-owned practices—especially those with only one or two partners or shareholders—find themselves sliding down the slippery slope of debt financing. Most business owners, including doctors, would never advise friends or family members to live off their credit cards! But when debt threatens to overwhelm their practices, that’s essentially what they’ve done in their businesses.

Unless you can print your own money, a high-debt strategy is untenable for the long term. (That’s how the Fed manages to stay afloat in a sea of red ink.) If your practice has more than six or eight significant loan/lease arrangements, consider that a potential red flag and possibly a signal to talk to your banker about consolidation.

However, the big trouble with consolidation loans is this: Once a practice has lowered its monthly debt payments, it can become tempting to activate new lines of credit. In the end, it’s in worse shape than it was before signing the consolidation note. Since the “profit margin” in a private practice refers primarily to the owners’ compensation, a practice that uses credit lines to pay doctor salaries is following a no-win strategy: Questionable at best—downright foolish at worst.

Physicians often throw money away every month by not properly managing their loans and leases. They lose control incrementally—taking out a loan here, an equipment lease there, and a business line of credit—and eventually find themselves “treading water” financially. Equipment leases have become very common. They often have hefty prepayment penalties written in, so even physicians earning a good return on the equipment investment wind up paying every penny of interest demanded by the contract. A capitalization loan usually rewards the debtor for early pay-off.

Physicians might want to consider loan consolidation, capital financing instead of leases, and real estate investment rather than facility rental. That last bit of advice can serve as an integral part of a good exit strategy. Real property increases the practice’s overall value when it comes time to sell.

When looking for help with financing, medical practices should seek out banks with departments specializing in healthcare providers’ unique needs.