By Jaime Lackey
Finding a lender you can love
You’re ready to start your own practice, acquire an existing practice or buy your own office building. Or maybe you just want to refinance while interest rates are still low. How do you choose a lender that will give you a fair chance?
“A degree and a business plan won’t get you a loan,” says Felicia Stewart, D.C., who speaks on financial issues at the Women in Chiropractic Forum. “You need experience, good credit, some liquidity and a receptive lending institution.”
Stewart purchased her own office building in 1996 and developed an additional office building on the property in 2004. Her first loan application was turned down—despite the fact she was a customer of the institution, had eight years’ experience and possessed significant collateral.
Shortly thereafter, Stewart found a lender who understood her practice and recognized the opportunity of her real estate purchase. The same lender quickly approved a loan for construction money when she showed up with building plans and eight pre-signed tenants for the second building.
The moral of Stewart’s story? “Don’t expect your current bank to work with you just because you have an account with them,” says Matt Parker, vice president of commercial finance with Oldsmar, Fla.-based Coffman Capital, a finance consulting firm specializing in loans to health care practitioners.
Identifying Accommodating Institutions
According to Parker and Stewart, some banks simply prefer to target other types of business. They may be happy to handle your checking account and credit card processing, but they’re not necessarily willing to make loans to small businesses or service businesses with little collateral within the practice.
Parker says some lending institutions sponsor chiropractic seminars to develop new client relationships—but even some of these groups focus on account services and don’t make business loans to chiropractors. “You want to find a lender who focuses on small entrepreneurial individuals,” Stewart adds.
Often, community banks are more willing than large banks to understand your practice and invest in a local business, says Lou Sportelli, D.C. and president of NCMIC, which provides financial services including equipment financing. And the loan officer’s ability to assess your business model or business plan is critical, Sportelli explains.
If the loan officer doesn’t understand your chiropractic practice as a viable business, then chances of having your loan approved will be slim. Even if the loan is approved, but the perceived risk is high because the loan officer doesn’t understand the business, then you could pay a higher interest rate.
Specialty consulting firms like Coffman Capital, however, understand both the chiropractic business model and the lending industry. Subsequently, this knowledge paves the way for loans.
“We’ve worked with banks whose official policy excluded chiropractors from consideration for professional loans,” says Parker. “Often, with a deserving client, we can put together a quality presentation and get the bank to approve the loan as an exception to policy.”
Of course, your selection process should be anything but arbitrary. “If you’re looking to start a new business, ask about the volume of loans the lender makes to startups,” suggests John Wade, financial analyst with the Small Business Administration (SBA) Office of Financial Assistance. Chiropractors looking to open a new business will save time and energy by crossing off their lists the lenders that do little startup lending.
He also suggests that you ask what will happen if you should suffer some setback and have trouble making a payment. It’s important to choose an institution that has the flexibility to modify payment terms if there’s a good reason.
Parker notes the SBA allows banks to defer payments with or without its permission, depending on how long the deferment may be. And temporarily converting to interest-only payments isn’t uncommon, he says.
Sportelli adds you should ask up-front if the loan officer has the ability to make a loan in the amount needed. If not, then he says you shouldn’t waste your time. Ask to speak to someone with higher lending limits.
According to Parker, a majority of chiropractors don’t have the collateral or down payment required for a conventional loan. If this is the case, then you’ll likely need to seek a loan backed by the Small Business Administration.
“‘Are you an SBA-Preferred Lender?’ is one of the first questions you should be asking a lending institution,” Parker says. An SBA-Preferred Lender doesn’t have to send the loan to the SBA for full underwriting; rather, regulations require only a brief eligibility review and issuance of an authorization number.
Of course, the SBA doesn’t directly loan money to businesses. Instead, it guarantees portions of small-business loans, which makes lending institutions more willing to take on loans with higher perceived risk.
Overall, 4,500 SBA lenders exist in the U.S. These include banks, thrifts, credit unions and non-depository lenders. Each state has at least one SBA district office, where a lender-relations specialist can provide a list of potential lenders in your area. Lending consultants like Parker also have relationships with SBA-Preferred Lenders.
So when obtaining an SBA loan, ask the lender how much of its SBA lending activity is sold. While lenders must retain the unsecured portion of the loans, they may sell the portion of the loans that are guaranteed by the SBA.
However, the originating lender must continue to service the loan. In other words, while you may deal directly with the same lender throughout the life of the loan, the originating lender may not have full authority to modify the terms of the loan. This is important to note, should you have trouble making payments in the future.
While customer service and long-term banking relationships are extremely important, everything else pales in comparison to loan structure.
In other words, find out the interest rate and fees for a loan. Ask about fees for late payments or bounced checks, because accounting errors can happen to anyone. And make sure your loan doesn’t have prepayment penalties.
“SBA loans of fewer than 15 years have no prepayment penalty,” Parker says. “If the loan is more than 15 years, the prepayment penalty the first year is five percent, the second year is three percent, and the third year is one percent, with no penalty after the third year. Equipment leases are an alternative to business loans for startups. However, if the lease says there’s no prepayment penalty, check for an ‘early repayment option,’ which probably says ‘sum of the remaining payments’ with a small discount. This means almost all interest is included.”
Negotiate for better rates, Sportelli encourages. The better your debt-to-income ratio, the greater your ability will be to negotiate better lease terms.
Don’t be afraid to compare apples to apples, urges Anne Blain, CEO and president of Farmington, Mich.-based Chiropractic Federal Credit Union. If you simply compare interest rates, you may not realize the loan with the lower published interest rate has a different interest rate calculation, higher fees or prepayment penalties. Ask how much interest you’ll pay over the life of the loan and get a full list of fees for true comparison.
She also suggests you ask about relationship pricing. Can you get a lower interest rate on your loan if you open a checking account, sign up for a credit card or use other banking services?
Don’t get too excited if you’re approved for a loan, though. All the experts agree that a lender can display numerous different behaviors which should immediately arouse your caution.
“Beware of any lender who scrimps on working capital or a line of credit,” Parker says. “Such a lender is just putting you at higher risk of default. Instead, you should try and choose a lender who wants to help you succeed.”
He also notes you should never pay up-front fees to a third-party loan consultant. And only pay any agreed-upon fees after the loan closes.
Do a little research regarding the stability of the lending institution. As effects of the recession continue to impact banks, Parker recommends checking watch lists (such as bankimplode.com/blog/) to learn which institutions to avoid. Blain recommends chiropractors in the market for a loan review potential lenders thorough Bauer Financial, which rates banks and credit unions.
Today, the unfortunate truth is that fewer options exist for chiropractors looking for financing. Lending institutions are under tremendous pressure from their boards of directors and regulators to justify each loan. But with a little perseverance and some homework, none of these obstacles should prevent you from finding reputable lenders who are willing to help you grow your business.
- Will you lend to professionals without collateral? In particular, will you lend to chiropractors?
- How familiar are you with the chiropractic industry?
- Are you an SBA-Preferred Lender?
- What is your level of startup lending? (Important for chiropractors starting new practices.)
- What are your interest rates? (SBA rates are usually the same: Prime plus 2.75 percent, which is the maximum allowed by the SBA, ?unless real estate is involved.)
- Is your interest on loans calculated using the simple interest formula? If not, what formula do you use?
- If I should experience a temporary lull in income, how flexible can you be with a modification of payment terms?
- Does the loan have prepayment penalties? What are the costs and interest payments associated with an “early repayment option”? ?(This applies to equipment financing, too.)
- What are the penalties for a late payment or a bounced check?