Within the ever changing healthcare industry, many well established doctors are finding themselves transitioning into private

Practice Financing and the SBA

By Matthew Parker, Coffman Capital Inc.

Most physicians in practice today have never had= to deal with government-backed financing. Fortunately, banks, specialist finan= cing and leasing companies have been able to meet the needs of the medical commu= nity for the most part.

However, there oc= casionally arises a situation with a newer practice or one in expansion mode where an opportunity exists to take advantage of U.S. Government sponsored business financing via the United States Small Business Administration, or SBA. But in order to properly exploit t= hese programs, one needs to know something of the agency’s history and rai= son d’etre.

What is the SBA?

During the Eisenhower administration of the 1950’s, the U.S. Government saw a need to support small business and therefore bolster employment and increase the overall tax base. In time, pr= ograms were developed and evolved into the current state of the U.S. Small Business Administration.

In addition to emergency loans and grants, the S= BA has very active and popular loan programs known as the 504 and 7(a) loan programs. Contrary to popular belief, the SBA does not actually lend the money for these programs. Rather, it guarantees loans made by private institutions.

= 504 and 7(a) Programs

The SBA 504 program is meant for medium-sized re= al estate transactions where a business is purchasing and renovating a building for its own use. This brings = up a very important point: the SBA only lends to businesses, and not for investment real estate purposes. In order to be eligible for an SBA= loan, real estate must be at least 51% owner-occupied. This immediately eliminates apartm= ents, shopping centers and office buildings. However, buildings used for medical offices are usually eligi= ble for these programs, as long as the owner occupies just over half the space.=

The 504 program allows a lender to lend up to 50= % of property price or value (a very favorable equity position) in front of a fi= xed rate, long term SBA-guaranteed second mortgage, for a total of up to 90% of= the project, including purchase price, renovations and closing costs. The second mortgage is funded by b= onds sold in the marketplace, and usually takes several months to close.

The SBA 7(a) program is the most popular and uti= lized program among lenders and borrowers alike.= Basically, a bank or other institution makes a business loan for real estate, business acquisition, working capital or equipment and the SBA guarantees the loan for 75% of the balance (80% for loans under $100,000).<= o:p>

How can SBA loans help me?

So what does all this= have to do with today’s medical practice?&nb= sp; Simple: it allows a ba= nk to make a loan it otherwise might not. The banker’s mentality is to make loans thinking how to get ou= t of them if they go bad. A medical practice typically has a small amount of physical assets to liquidate in ca= se of loan default, in relation to the earnings and actual market value of the practice’s patient base. Therefore, a bank cannot usually make a large enough practice acquisition or working capit= al loan based on just the liquidation value of the assets – unless it has an SBA guarantee= .

Only non-bank SBA lenders will typically make a = loan based on the cash flow of the practice.&nb= sp; In fact, some non-bank lenders such as Coffman Capital can actually = lend up to 125% of the value of a practice to finance a practice acquisition, us= ing non-SBA financing.

Other SBA Advantages=

Another use of the SBA 7 (a) program is to achie= ve maximum leverage. Banks typically lend 70-80% on bus= iness real estate, while an SBA loan can be up to 90% of purchase price plus improve-ments, working capital and closing costs= . This may allow an expanding practi= ce to preserve working capital and avoid expensive factoring arrangements.

Finally, SBA loans typically have a longer term than most bank loans. While a bank will usually make a b= alloon loan, SBA loans are always permanent. Also, SBA loans have longer amorti= zation periods, for lower payments,= which preserves working capital. SBA working capital l= oans are typically 7 years, equipment loans 10 years, and real estate loans up t= o 25 years, compared to 5, 7 and 15 or 20-year typical bank amortizations, usual= ly with an earlier balloon date. SBA borrowers will never be forced to refinance a business note until the borrower desires it.

There is much more to discuss about SBA loans and their possible application in the medical professions, but our space here is limited. We invite you to vis= it the SBA’s website at www.SBA.gov, or call the offices of Coffman Capital, Inc. at 813-891-1811.