How to Finance Your Practice from Startup to Growth

Remember last week’s article?

I talked about 3 things to ask yourself before you start your practice…

  1. Am I absolutely clear about what I want?
  2. Should I build or buy my business?
  3. Would it be better to bootstrap or take on debt?

If you’d like to read the full article, you can read it here.

It Takes Money to Make Money

The “where to find the money to start my business” challenge is not unique to clinicians. It’s a hurdle almost all new and established entrepreneurs face… across all industries.

And even though it may not take a huge amount of money to get started in your own practice, you do need some money to get going…

That’s why today’s article is about where to “look” for money to get started. Let’s discuss available options to get your practice off the ground or to grow it.

But before I continue, and at the risk of repeating myself…

I want to stress the importance of knowing yourself and knowing what you want. This simple step is guaranteed to save you time, money, and headache.

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Yours or Theirs…?

If you’ve been looking for any length of time to “find” money for your business, I’m sure you’ve noticed the many options to choose from. Needless to say, some are better than others…

Essentially there are three ways to fund any business:

  1. Money from your own resources.
  2. Money from outside resources.
  3. Money from both, your own and outside resources.

Money From Your Own Resources

When utilizing funds from your own, or against your own resources, you may look at:

  • Dipping into your savings.
  • Using a personal credit card.
  • Taking out a personal loan.
  • Utilizing a personal line of credit.
  • Refinancing your house to free up cash.
  • Cashing out investments.
  • Taking out a second mortgage on your home.
  • Borrowing against investments.
  • Borrowing from family and friends.

Money From Outside Resources

When looking at utilizing funds other than your own, you might consider:

  • Taking out a business loan.
  • Establishing a line of credit for your business.
  • Utilizing a business credit card.
  • Applying for a Small Business Administration (SBA) loan.
  • Applying for a grant (may or may not be tied to Non-Profit status).
  • Establishing a partnership (silent or active).
  • Loans from a private investor/s.
  • Financing business real estate with a mortgage.
  • Taking out a lease for your equipment.
  • Establishing trade credits.

Two Broad Categories

Financing sources can also be grouped into two broad categories, which are:

  • Equity Financing
  • Debt financing

Equity Financing

Here you would finance the startup of your practice by giving a certain percentage of ownership to the person or entity putting up the money. This could be a business partner, a family member, or an investor.

You’re probably thinking “This is not commonly done, or is it?” And you’re correct. Equity financing is not that common for a small medical practice.

Generally, investor financing is not utilized to start a small practice. And more often than not, a family member may put up money in the form of a loan, but not take ownership of the practice (liability…).

Consider a Partnership

However, starting a small practice with a partner may be something to consider.

A partnership is a business owned by two or more individuals or businesses. Each partner initially contributes funds to start the business.

Partners can be silent (are not involved in the day to day activities) or can be active and work in the business. Partners share in the risks and the rewards of the business.

Seeking out partners may be a way for you to finance your startup or your business expansion.

But considering a partnership is no small undertaking!

Sit down with your prospective partner and talk about your common goals. Discuss how each of you likes to work and run a business.

If you decide to move forward, put a written partnership agreement in place. Outline and address everything.

Consider utilizing the services of a professional when setting up the partnership.

Debt Financing

Once you know how much money you need to start your business, you may elect to raise the funds by going into debt.

Even though debt financing comes in many forms, it essentially means that you get the money to start your business by borrowing it.

Most commonly this is done by borrowing money from a lender, family, friends, or against your own assets.

Sources of Debt Financing…

As mentioned earlier, typical sources of Debt Financing may include:

  • Taking out a business loan.
  • Establishing a line of credit for your business.
  • Utilizing a business credit card.
  • Applying for a Small Business Administration (SBA) loan.
  • Loans from a private investor/s.
  • Financing business real estate with a mortgage.
  • Taking out a lease for your equipment.
  • Borrowing against your own assets.

Since bank loans and leasing are common ways to get started or expand a business, I’ll discuss these in greater detail here.

Bank Loans

Banks offer a wide range of financial products you may utilize at one time or another:

  • Lines of business credit.
  • Loans (secured by personal assets and/or guarantee).
  • Loans (secured by property and/or equipment.
  • Mortgages for business real estate.
  • Investment products for your business.
  • And many other financial products …

Often small business startups will be required to secure a business loan with personal assets. Or you may be asked for a personal guarantee of repayment, even though you are organized as an LLC or a Corporation.

Put yourself in their shoes. Wouldn’t you want some kind of background information and/or guarantee before you lend your cash to a stranger? Of course you would!

Banks are in the business of generating revenue for their shareholders. However, they will only generate revenue with their loan products if they can be reasonably certain that loans will be repaid.

In all likeliness, banks will also take a close look at your personal finances. They will scrutinize your personal finances for signs of trouble: the amount of debt in relation to income, your credit history, your monthly financial obligations …

Banks wants to know that if your business runs into trouble and you won’t be able to make payments from business income, you can always repay your loan using your personal funds.

By the way, don’t limit yourself to big name banks. Check out your local credit union, savings bank and small community bank.

Once you start checking around, you’ll be amazed how many different options are out there for you.

Equipment Leasing

Leasing companies can help you start or expand your business. These companies specialize in leasing medical or general office equipment (computer equipment or high-ticket medical equipment) with financing typically spread out over a number of years.

While this can be a great way to get started and to expand, be aware that it may be difficult to determine the exact interest rate and hence final price you will be paying for a piece of equipment.

The equipment lease typically is secured by the equipment itself. And while a personal guarantee may not be required, you will lose the equipment should you fail to make payments.

If you’ll go the leasing route, make sure that you read the fine print, be clear on what you’re paying for and for how long. Also, be clear on who is responsible for repairs to the equipment during the term of the lease and what happens at lease end.

Even though a viable option, you may reserve equipment leasing for high ticket, special items. You may want to purchase smaller office equipment, like computers, printers, etc.

Combined Approach: Your Own and Outside Money

Depending on your situation, this approach may serve you best. And it doesn’t matter if you’re just starting out or are established and want to grow your business.

In this scenario you would do two things:

  1. Dip into your savings or perhaps cash in part of an investment to help you finance your new business or business expansion.
  2. Utilize a business loan or establish a working line of credit for your business.

 Here’s What To Do Next…

Before taking on any debt put the odds in your favor by asking yourself a set of questions.

Your answers will tell you if going into debt to start or grow your business is the right thing for you.

If you are just starting your business, ask yourself these questions:

  • Will I be able to service the business loan along with my other financial obligations of my family (just in case)?
  • Are there favorable loan terms and interest rate?
  • What would I do if my business would fail?
  • How would a loan default (for whatever reason) affect my personal life?
  • Am I prepared to take the calculated risk?
  • Am I willing and prepared to do whatever it takes?

If you are already in business and considering taking on new debt, ask yourself these questions:

  • Does my business need this new debt?
  • Will the new debt lead to new or increased revenue?
  • Are there favorable loan terms and interest rate?
  • How will the new debt affect my current debt service?
  • Will the new debt affect my personal finances?

Let’s remember that the reason for taking on business debt is to generate more revenue. Taking on business debt should enable you to work with greater leverage.

For a medical practice, this could mean that money from the loan allows you to lease more space, hire more staff, and serve more people; all while generating more revenue.

Compare this to taking on business debt primarily to continue with an unprofitable business. Here the money from the loan is “used up” to keep the business afloat without being put to use as a way to increase leverage.

Debt equals risk.

Don’t jeopardize your business (or personal finances) by taking on too much debt or debt that is too expensive.

As always, let us know what you think…

 

By Johanna Hofmann, MBA, author of “Smart Business Planning for Clinicians” and regular contributor to the NPBusiness blog.

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