When to Expand Your Business
Key questions to ask when you’re weighing whether it’s time to grow.
By Mike Bigley*
The current climate makes it difficult to imagine what the lending and overall business environment for small businesses may be going forward.
However, the effects of the COVID-19 pandemic and related closures on businesses make revisiting and revising business plans even more critical. Whether you require financial assistance beyond that available to businesses impacted by COVID-19 or are seeking capital for other reasons — equipment purchases, business development, expansion, debt consolidation/refinancing, and working capital — there are a number of ways to access capital, but each comes with a cost that must be measured in terms of time, efficiency, and short- and long-term effectiveness.
While consolidation has continued in the industry, the majority of private physical therapy practices still have a smaller number of owner/therapists and locations. This particular aspect of private physical therapy practices can make accessing capital a little more challenging. Smaller practices and start-up practices might find it more difficult to obtain capital through more traditional approaches and, therefore, friends and family are an option, but this method comes with potential complications.
Crowdfunding has become more popular (e.g., Kickstarter, Fundable, etc.) and could allow you to better leverage friends, family, customers, and suppliers. Crowdfunding is relatively new and interesting but a misconception of the approach is that it is easy. It requires an enormous up-front effort in communication and marketing. The sites are very user friendly for setting up a profile, a funding goal, and collecting and distributing funds – minus their fees and expenses. The issue is that YOU have to attract the investors and get commitments ahead of your launch with calls, emails, and meetings to create a successful program. Crowdfunding sites create a wonderful platform for you to centrally communicate and market, and allow you to leverage your network of contacts. In addition, you can shorten the timeframe to obtaining capital as you determine the fundraise goal and end date that can conclude more quickly if you have done a good job of up-front marketing.
Outfitting or upgrading equipment for an office can be capital intensive. If the practice has cash reserves, making an outright purchase is the simplest way to proceed, but this ties up capital and might not be the best use of funds. Leasing the necessary equipment can spread the cost over time and is usually easier to obtain the required credit, but will increase the total amount you pay for use of the equipment.
There are generally two types of leases. An operating lease allows you to rent the equipment for a set period, requires little up-front money, and you don’t have the carrying costs of aging equipment. You also don’t own anything and have to replace the equipment at lease term, but this arrangement works well when capital is tight. As a general rule, if you plan to use the equipment for five years or less and/or changing technology could result in obsolescence, an operating lease could be appropriate. Some equipment is a more permanent fixture in the office and for those a capital lease allows you to acquire the equipment (often by making some additional payment) over the lease term. The two types of leases are treated differently for tax purposes, which will also impact the decision and practice cash flows and should be reviewed with the practice accountant.
The previously noted borrowing methods might be appropriate for newly formed practices, or for practices that are credit or cash challenged. For a higher cost the practice can get access to funds and attempt to work back to profitability. However, the most popular way to access capital is through a traditional bank lending process. This is going to be your most flexible financing option since you can use the funds for any potential need of the practice. As with most other aspects of your practice, communication and relationship management are paramount to the successful financing of your business.
Once a need for capital is determined or planned, documentation is critical. The first thing a banker is going to ask is why you need the money. You should have a business plan or description of the benefits to the practice, whether it is positioning, a money-making equipment purchase, real estate, etc. In addition, you will need a detailed financial history of the practice. This would include practice financial statements, balance sheet, income statement, statement of cash flows, and the last few years of tax returns for both the practice and you personally. After your credibility and financial standing have been documented, collateral will be required to secure or partially secure the loan. Hard assets with equity are preferred and would include real estate, securities, equipment.
Therapist/owners should be aware that accounts receivable are not a particularly attractive asset for a banker lending to your practice. The bank cannot perfect a lien on receivables from Medicare or Medicaid and therefore, if your practice has a larger share of those patients, the banker will not consider these receivables as assets in your practice. In many cases, assets in an independent practice are insufficient collateral to justify a loan without the personal guarantee of the therapist/owner.
The borrowing process is made easier by an established relationship with your bank. A relationship that you should start early and work at continually. I spoke to several therapist/owners who indicated that they have repaid previous loans for equipment or working capital and established a track record with their bank. Loans are normally obtained from the bank that maintains the checking and savings accounts for the practice so they also have a comfort level with cash flows. In addition, this ongoing relationship will usually result in streamlining the often onerous documentation requirements. Most banks have “private banking” or “preferred customer” areas that you can move into after you develop a good track record. The private banking relationships will facilitate the lending process which can save you time and frustration when capital is required for your practice.
A good relationship with your bank/lending institution can also open doors to capital you might not have otherwise considered. Banks administer federal, state, and local programs designed to facilitate small business owners access to capital. One example is the Small Business Administration (SBA) 7(a) Loan Program. The SBA does not make the loans but sets guidelines and then provides a guarantee that allows the lending institution to make what might be categorized as a “riskier” loan. A banker told me that the program was “not meant to make bad loans good” but was a program to support small business without sufficient collateral for a conventional loan. SBA loans can sometimes provide higher loan limits, lower interest rates, and longer repayment terms than conventional loans. Keep in mind, however, that the underwriting is not mitigated and documentation requirements will be substantial. In addition to the 7(a) Loan Program, the SBA also has other programs that could be useful for smaller loans and express loans for faster turnarounds.
Your practice may seek capital for a specific situation, like purchases of equipment or real estate, but all practices should establish a line of credit while in the process of developing a capital plan for the business. A business line of credit is a fixed amount of money that you can draw down at any time for almost any purpose. It provides the utmost in capital flexibility for the practice. You are free to pull your requirements up to the preset limit, and the portion you borrow is considered a loan. You pay interest on the amount that you borrow and repayment is usually flexible with monthly interest payments required.
When dealing with more conventional financing, most borrowing is going to require the personal guarantees of the therapist/owners. The best asset in a private physical therapy practice are the therapist/owners. You control the cash flows, budgeting, and, ultimately, repayment of the debt. If the practice is generally healthy and you are thinking more long-term about asset purchases, expansion, or other reasons noted here, this may not be a problem. The therapist/owners can probably provide more collateral than the practice, as income is taken out of the practice and used to build net worth. This provides much more security for the banker and will result in lower borrowing rates and more simplified documentation. Clearly the risk is that you cannot walk away from loans that are personally guaranteed and therefore, the cost/benefit needs further consideration.
As I write this article our country is in lockdown and it is difficult to imagine what the lending environment for small businesses may be in the future. Many small businesses will continue to require financial assistance through coronavirus-related legislation including programs for grants and low-interest loans to support businesses so badly impacted. As noted in the article, relationship management with your lending institution is even more critical in times of stress. Be diligent and communicate often to work out the best alternatives for your practice.
Mike Bigley is the principle at Strategic Wealth Management and a registered representative with Mid Atlantic Financial Management, Inc. an SEC Registered Investment Advisor in Pittsburgh, Pennsylvania. He can be reached at (412) 391-7172 or by email at email@example.com.
*The author has a professional affiliation with this subject.