Finance: When You Want to Expand

When family physician Scott Litton launched his medical career in August 2003 deep in Lee County, Va., his practice employed only two staff members besides himself - a nurse and a receptionist. Litton rented two suites at the medical professional building connected to his local hospital, Lee Regional Medical Center. But rural Pennington Gap (pop. 1,781) needed Litton's services more than he expected. The new doctor's patient load quickly rose to more than 40 visits a day. "After I was in practice for a year, my volume was so overwhelming," says Litton. "I could take care of their checkups; that was fine. But if they got sick in between, well, that's when it got hard."

Litton added more nurses, a nurse practitioner, a lab tech, and a second receptionist to his staff. He also doubled his office space to 2,200 square feet, and for a very good price: "It didn't cost me a dime," says Litton. "I leased the space from the hospital, and they picked up the cost of the equipment. And we didn't lose one day because it was the [Christmas] holiday; they did the renovations during the break."

Litton is living out his lifelong dream of being a solo practitioner in a rural area. To realize that dream, he committed to a three-year stint at Lee Hospital before entering medical school. The hospital picked up the tab for his education and lent him money to start his practice - a 36-month, interest-free loan, of which only 80 percent had to be repaid.

That's one way to raise capital, ulcer-free.

But Litton admits that his goal of serving rural America is not for everyone. Solo practice itself is declining as more and more practices consolidate to cut costs and expand services. As they grow, larger practices become ever more administratively complex. Physicians and office managers must master new business skills, including knowing what to do when they need to raise capital for an office expansion or major medical equipment purchases.

What are your financing options? In general, cash or credit. But choices abound within these two categories. Do you know how to sort through the current maze of borrowing options to find the one right for you? Or do terms like "boutique lender," "private placement," and "portfolio investor" buzz like white noise in your ears? If so, this two-part series on raising capital is for you.

Boutique equals unique

Greg Lemay's briefly stated opinion on borrowing money from a bank leaves little doubt regarding his position: "You walk into a bank, they give you an umbrella when it's sunshine, and they take it away when it rains."

The vice president of finance for Doctorfunds.com, an Internet vendor specializing in financing arrangements for physicians, Lemay says his company offers more flexible, customized support because, he says, "We've found that doctors seem to know very little about finances. A typical doctor will turn over his whole financial life to his $10-per-hour office manager."

Are your office manager's bookkeeping skills on the money? Maybe. Maybe not, says Lemay. "Doctors get into situations where they don't have any idea how much it's going to take to run a practice."

If you don't keep your finger on the pulse of your practice's finances, you may find the life drained from your credit just when you want to explore financing options for that spiffy new ultrasound machine. Or everything may be just fine.

Physician-specific lenders - also known as "boutique" lenders - such as Doctorfunds offer a wide spectrum of financing options to their clients. "We work with doctors who have 'A' credit down to those who have credit so bad they'd have to have a co-signer if they paid cash," explains Lemay.

Typically, boutique lenders gain loan approval for their clients by working through a list of underwriters until they find one that fits a specific client's needs. "If one underwriter cannot get it done, we go to another," says Lemay. Of course, the more a client is perceived as a financial risk, the lower down a lender must go on its list. This adversely affects a client's buying power.

Sales companies such as Barrington Medical Equipment often refer clients to boutique lenders, although physicians, like anyone else, are free to seek financing wherever they please. Indeed, most go to their own banks. Based on a physician's specific financial circumstances, "We recommend a particular lender," says George Webb, a sales representative with Barrington. He's quick to point out that these recommendations yield no benefit (such as commissions) to his company. "We don't get a finder's fee or anything at all," he says. "That's not a good [business] practice."

Webb agrees that boutique lenders can offer more to their customers than traditional sources. "They know what they're doing," he says. And with a minimum wait time: "You go to your bank, then the loan committee meets. With [a boutique lender], you'll get a turnaround in 24 hours."

But while boutique lenders offer flexibility and fast decisions, they're not for everyone.

Andrew Mintz, executive director of Summit Medical Group (SMG), is not a fan of boutique lenders. "I think that's a fancy way of saying, 'We charge higher interest rates,'" he says. "If you go to a boutique shop, they charge you more, and they want all kinds of guarantees."

Mintz's Berkeley Heights, N.J., practice just completed a major office expansion over the past year. The group's 250,000 additional square feet now house a myriad of ancillary services, including a second MRI, a third physical therapy facility, a pharmacy, an optical shop, a day spa, a patient library, and a café. The price? "In the tens of millions," says Mintz.

Raising that much capital required securing loans from Provident Bank and using the practice's operations investment money to fund the real-estate purchase and build out. Securing a master lease through the Bank of America allowed SMG to purchase its new equipment, furniture, IT, and other necessities.

Mintz says the four-year project came in on time, within budget, and essentially as planned. "We cut the pool," he says, referring to the practice's decision to eliminate its planned aqua therapy from its new list of ancillary services.

SMG's success is a credit to the group's proper planning, prudent implementation, and healthy financial standing. But "some physicians - such as those fresh out of medical school and just setting up a new practice - are not in a robust financial situation, so generally they have to go to an institution like [a boutique lender]," says Mintz, who admits that in such circumstances, these lenders do "serve a good purpose."

Of course, if you are seeking to add new equipment to your practice, leasing is another option you may want to pursue. Both leasing equipment and taking out a loan to purchase new machinery present pros and cons you should carefully consider. "Leasing allows you to get the technology you need for a specific period of time," says Webb.

True, but caveat emptor if you select this route. There are many different types of leases, rife with conditions such as the "evergreen clause," which automatically renews a lease at the end of its term unless you advise otherwise - potentially trapping you in a situation in which you continue to pay for equipment you no longer use. 

Banking on tradition

Quincy Medical Group chose a three-pronged financial solution akin to SMG's when it added a surgery center, imaging equipment, and the capacity to accommodate 40 medical suites in its large practice. The group raised its capital with "basically bank financing for the majority, a small percentage of cash down, and some vendor financing," says Chad Hines, the group's executive director of finance. The large, physician-owned practice, based in Quincy, Ill., chose to cultivate a new banking relationship for its expansion project.

Hines says the group's expectation is that its expansion - which took about a year - will "grow and broaden revenue streams" with the added services. All in all, he deems the expansion as well as the group's chosen method of raising the necessary capital a series of good decisions steeped in proper planning and founded on a solid banking relationship. Effective communication between the bank and the medical practice led to a cooperative, detailed exchange of information. This then allowed the bank to put forth a competitive lending package that Quincy Medical Group could financially handle. The physicians were so pleased with the outcome that they say when the time comes to expand again they plan to follow the same strategy.

William Soper, a family practitioner from Kansas City, Mo., concurs. "Bank financing is almost always the way to go," he says. "You're going to get the very best rates." After all, he adds, "Banks want your business - you might change your accounts to their institution."

Soper does agree with the boutique-lender notion that physicians are often clueless when it comes to money matters: "I can't tell you how many docs I know who have no idea how much their car costs - just their payments. I think the same thing happens with medical equipment."

So Soper recommends shopping around. Explore all your options, and make sure you understand the particulars of the financing method you choose. Two years ago, Soper was in the market for a $180,000 laser apparatus that would allow him to add cosmetic ancillary services to his practice. "The lease the laser company was setting me up with seemed OK, but when I got to the particulars, they were charging me 21 percent interest," he recalls. "So I just called my banker."

The "bank-tique" blend

If your planned expansion requires construction, you want to ensure that your lender understands the peculiarities of the real-estate market as applied to the field of medicine. Buildings used for medical purposes differ from other commercial real estate in that they are single purpose in nature and tend to be large in scale. And many medical buildings accommodate multiple businesses, all of which must come to some common understandings regarding the space they share. In this case, a healthcare-focused lender may help keep the project moving forward.

"We serve hospitals, joint ventures, specialty niches such as cancer treatment, and multi-office medical buildings," says David Young, senior vice president of loan originations for GE Healthcare Financial Services.

Indeed, construction code compliance is much more stringent regarding medical buildings in terms of usage and safety rules and regulations - hallway width, medical waste management, and hazardous materials usage are just a few of the factors that must be taken into account. Medical construction must also hurdle numerous tax and legal issues that can quickly trip up a busy physician.

"We understand the market, the product, and the operators as borrowers and as leaseholders," says Young. "We're sensitive to their issues - tax laws, etc. And we're aware of Stark laws - restrictions that physicians have to adhere to when they invest. They're highly regulated. Those are areas of expertise that we're grounded in."

This type of lender offers distinct advantages over a bank, including a higher loan-to-value leveraged transaction, more flexibility in loan-to-value and loan-to-cost ratios, and a tailored lending package. Banks tend to offer more canned, off-the-shelf products.

Young says that when borrowers approach GE Healthcare Financial Services, the company asks that they complete a very detailed application form, describing the practice's inner workings as much as possible. "[We use] an extensive interview process to discover what [the customer] is going to need," says Young.

What does the resulting finance package look like? It depends, but expect it to be multifaceted, with customized loans, lease agreements, and other solutions we will cover in part two of this series. "We compete and provide products across the spectrum for all kinds of providers," says Young.

Sound complex? It is. But if your practice expansion looms large dollar-, space-, and service-wise, a medically oriented financial institution may best serve your needs.

Closing time

Regardless of the size of your potential expansion, take a hard look at any proposed lending agreement drawn up on your behalf. Ideally, you'll be working with others - your physician partners, your administrator, your accountant, your attorney, and perhaps even your Great Uncle Al because he's always been good for objective advice.

Iowa Clinic CEO Ed Brown, whose practice is "50 percent certain" it will soon expand, says this momentary step-back is absolutely critical. "When it really comes down to crunching the numbers, the physicians may decide what we have on paper doesn't make good sense. And that's OK," says Brown. "It takes more courage sometimes to walk away from a deal. If it doesn't make financial sense to do something, you don't do it."

Whether expansion is in your immediate plans or not, it's good to stay future-minded. Soper says he would like to buy or construct his own medical arts building at some point: "I think about it every day. And my CPA and I talk about it annually. But at the moment I'm doing pretty well, and since I do inpatient care, it's convenient [being attached to the hospital]."

Litton also thinks about further expanding his thriving rural practice, although this country doctor has it easier than most: "This being Mayberry, one of my patients is my banker," he says, a grin attached to his southern drawl. "He says if I need something, just say the word."

Still, Litton says he can't emphasize enough the need to maintain a solid financial relationship with people and institutions that can help fund your business decisions. "Bankers love doctors," Litton observes. "Establish a good relationship. If you can't, then get a different banker. I guarantee there are banks that will bend over backwards to get your business. Make your bank your first source for all your financial needs. Even if your bank is not prepared to handle the deal itself, they'll bring in another to handle it, and they'll take care of you."

Shirley Grace is senior writer for Physicians Practice. She can be reached at sgrace@physicianspractice.com.

This article originally appeared in the November/December 2006 issue of Physicians Practice.