Do your research to find best terms for business loan

Practice Management. By Julie A. Jacob, amednews staff. June 24, 2002.

PRACTICE MANAGEMENT

A column about keeping your practice in good health

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By the time you graduate from medical school, you probably never want to hear the word "loan" again. Yet there will likely come a time when you, or your medical group, will need a business loan. With a little comparison shopping and careful planning, you can find a loan with reasonable interest rates and repayment terms.

Business loans can be necessary for many reasons: to purchase another practice, buy a medical office building, purchase medical equipment or remodel the office, said Gayle L. Rosenfeld, vice president of professional services division of Fleet Bank Financial Co. in Boston.

Taking out a business loan involves weighing the benefit of what the loan is paying for versus the cost of the loan and interest. The benefit can be monetary, as in increased revenue, or something intangible, such as boosting patients' perception of the practice by remodeling the waiting room.

Physicians can get a loan from either a bank or a finance company. Each source has its advantages and drawbacks, say loan experts.

It's easier to get a loan from a finance company, said Andrew D. Schwartz, a CPA who works for MDTaxes.com, an online tax resource for physicians. The paperwork is usually less than for bank loans, and the finance companies have less stringent requirements for borrowers than banks do. In addition, finance companies may offer no-money-down terms for purchases of equipment.

Interest rates on loans from finance companies, however, are often higher than loans from banks, said Schwartz. In addition, loans from finance companies often "come with lots of strings attached," he said. For example, some finance company loans may forbid early repayment of the loan or require borrowers to pay back all of the interest, even if they repay the loan early.

"And I've seen some agreements that call for a buy-out at the end of the loan term, meaning after you pay off the money you borrowed, you need to write a check to the finance company for as much as 10% of the original amount borrowed," Schwartz added.

A loan from a bank won't have those sorts of onerous provisions, he said, and will have a lower interest rate. The drawback, however, is that more paperwork is needed, and a bank will usually offer a loan of up to only 80% of the purchase price of whatever the borrower is buying with the loan.

If a physician gets a loan through a bank, he or she should ask for one guaranteed by the Small Business Administration, said Schwartz and Rosenfeld. Banks are able to offer lower interest rates on SBA-guaranteed loans because they are less risky than non-guaranteed loans.

The drawback to SBA-backed loans is that they usually require more paperwork, although the SBA does offer low-document alternatives, said Schwartz. Information on SBA-backed loans is available at the SBA Web site (http://www.sba.gov/).

Physicians should get loans through their professional corporation instead of taking out a personal loan, loan experts say. But for a solo or small-group practice, the loaner will still factor in the personal debt of the physician -- including student loans. A heavy load of student debt might make it harder for a young physician to obtain a loan, but physicians in general are considered excellent loan customers because of their high levels of education and income, Schwartz said.

Nonetheless, a physician should look for a bank or finance company with experience granting loans to physicians, Rosenfeld suggested.

"It's best to find a banker who understands your needs," she said.

Another source of loan money is a home equity loan, Schwartz said. A physician borrows against the equity in his or her home and puts the money into the professional corporation.

That's risky, he warned, because if the practice can't repay the loan, "the physician is at risk of defaulting on the equity loan and then having his or her home foreclosed on."

An alternative to a loan is a line of credit, said Phillip Goldfarb, a CPA and partner with Weisberg, Mole, Krantz and Goldfarb in Hicksville, N.Y. Unlike a loan, with a fixed amount of money and fixed repayment schedule, a line of credit works like a credit card. The borrower only takes the money needed, then repays at least a minimum amount each month.

Jacob served as a staff writer for AMNews from 1996 to 2002.