There are many ways you can go when it comes to funding your business needs - cash, credit, loans and leases, to name a few. How do you know what best suits your needs?
Posted in Naturopath on Monday, July 18, 2022
Owning your own practice involves a lot more than simply being a skilled healthcare professional. To be successful you’ll also need to be part HR manager, part marketing genius, part operations specialist, oh, and also a financial guru.
But one of your most important ‘jobs’ is always going to be financial manager. If you understand how different financial products work, you’ll be able to decide what makes the most sense for your immediate needs and long-term goals. Let’s look at an example.
Case Study
Nancy ND wants to expand her practice to a second location in another part of the city. She’s currently juggling a backlog of patients, and many must drive across town to her office. If she adds a second location, she can make the patient experience better both by reducing travel time and by shortening the wait for an appointment.
Nancy is very smart with her money. She wants to make every penny work hard so the cost of setting up doesn’t impact her ability to be profitable sooner rather than later.
For the new office, she’ll need:
- A facility
- Waiting room furnishings
- Office and desks, chairs and storage; private area for breaks
- Staffing
- Marketing
- Technology
- Exam room equipment
Nancy anticipates it will cost $150,000 to $200,000 to set up the new location. There are several ways she can fund this venture. Let’s take a look at the options, and then see what she went with after considering the options explained below.
Types of Funding
Cash
|
Pros
|
Cons
|
- Can be depreciated over the useful life of the equipment.
- Using cash means there’s no debt. That’s a comfortable place to be.
|
- Once your cash is spent, reserves are depleted.
- You may have fewer financial resources in case of a personal or business emergency.
|
Credit Card
| Pros |
Cons |
- Can be easy, depending on your personal credit score.
- Minimal paperwork.
- Interest payments on the credit card are deductible as a business expense so you can reduce the amount of your business earnings subject to tax for these interest payments.
- Can be depreciated over the useful life of the equipment.
|
- Whether it’s a personal or business card, your payment history will impact your personal credit score, and will affect your ability to obtain future personal credit.
- If the business fails, you’re personally responsible for repaying that debt.
- The interest rate can be extremely expensive if you carry a balance.
- It’s easy to comingle business and personal expenses – a giant no-no for business.
|
Bank Loans
| Pros |
Cons |
- Can be depreciated over the useful life of the equipment.
- You may be able to roll all your debt into one monthly payment.
|
- It’s based on your personal credit score, so it may be difficult to qualify depending on your current debt such as mortgage, car payments and student loans.
- It may require a personal guarantee and is often secured by a blanket lien on everything in your office.
- There is a lot of paperwork to apply.
- Interest rates can be higher than alternatives.
- It reports to your personal credit, so if you run into issues, it will have long-lasting impact.
- You will have used your banker equity, meaning it may be hard to ask for another loan (even a personal loan).
|
Lease
There are two types:
Operating Lease – lower payments, and you can purchase the equipment at the end of the term for fair marketing value. You can trade in the equipment and start a new lease, or buyout at the end.
Capital Lease – higher payments, with a very inexpensive buyout at the end ($1 or 10% of the purchase price are common). This nominal buy-out is sometimes called a “PUT” – Payment Upon Termination, and the buy-out is required rather than optional.
| Pros |
Cons |
- The lessor usually maintains the equipment, so you don’t have to.
- It does not report to your personal credit.
- No down payment.
- Easy application.
|
- You are locked into a contract, so if your business changes, you may have payments on equipment you no longer want or need.
- You don’t own the equipment, so you can’t sell it.
- Potential balloon payment or interest rates may change payments across the life of the loan.
- There are different buyout implications that may affect your taxes.
- Although leases don’t have a visible interest rate, the equivalent is often “baked into” the monthly lease payment.
- You may pay more for the equipment than you would have by purchasing it up front.
- If the lease is long-term, the equipment may be obsolete before the term ends.
|
Equipment Loan
| Pros |
Cons |
- Can be depreciated over the useful life of the equipment or written off in full in the year of the purchase with Section 179 advanced depreciation.
- The equipment is collateral for the loan.
- There is often no prepayment penalty.
- Some lenders allow principal balance payoff.
- Money is paid right to the vendor.
- Simple to apply.
- Interest can be deductible.
- May boost your business credit score.
- Lender may help determine the best market price to sell your equipment and purchase newer if necessary.
|
- Potential balloon payment, or interest rates may change payments across the life of the loan.
|
Working Capital, Unsecured
| Pros |
Cons |
- Simple and quick, especially when compared to the alternative of securing a home equity or business line of credit.
- Frequently you can have funds in as little as 24-48 hours after applying.
- You are not required to provide receipts or explanations of purchases.
|
- Typically a shorter repayment term, so monthly payments may be more.
- Because of lack of security for the loan, the rates will be higher than the typical bank line of credit that may be secured by your home or other assets and accounts.
- The limits may also be lower than you are accustomed to being offered on a secured line of credit.
|
What did Nancy decide?
Let’s see how Nancy decided to manage the expansion of her practice to a second location.
Facility
Nancy has chosen to lease a space that’s already built out for a medical practice, rather than building from scratch. Real estate can be a good investment, but right now she’d prefer to invest in her practice. Leasing will save hundreds of thousands of dollars up front, and she’s made a deal with the building owner for right of first refusal should they ever decide to sell. Nancy sees that as a win-win.
Nancy will sign a lease.
Waiting room furnishings
Realizing that visiting a medical practice can be intimidating, and patient comfort is important to a good experience (and can generate word-of-mouth referrals), Nancy wants to create a warm, welcoming, safe space for both adults and children. Instead of rows of hard “reception seating,” she intends to buy gently-used furniture from a friend’s newly updated family room. Soft, squishy sofas and oversized armchairs will help people relax. Paying cash will get a lot more bang for her buck.
Nancy will pay cash.
Office and break room furniture
Great staff is even more important than marketing, in Nancy’s mind, because the team increases production while providing a better patient experience. When it comes to receptionist and staff areas, Nancy knows her team will be most effective when their workspaces are laid out efficiently and comfortably. She’d rather spend a little bit more on good ergonomic chairs than go cheap and possibly have to deal with back pain down the road.
Nancy will use working capital.
Staffing
Her current office manager will manage both locations. Each office will have a dedicated physician’s assistant and receptionist, so she’ll need to find and place those roles.
Nancy will pay staff out of generated revenues and use her working capital if needed. She has a personal line of credit available as a backup in case of emergencies, but she’d prefer to keep that on hand for, well, personal use.
Marketing
Even though there’s currently a lot of demand for her services in the new part of town, Nancy will need to do some marketing to ensure there’s enough traffic to make the location self-supporting. She’ll invite her current patients to an open house and send a direct mail invitation to prospects in the area. Of course, she’ll need new signage, and printed materials with the new address. She may join the neighborhood association and do some sponsorship.
Nancy will use working capital.
Computers, printers, practice management software/EHR equipment
While Nancy’s considers herself a bit of a techno buff, she knows when she’s out of her league, so she’s bringing in a consultant to ensure wiring is appropriate for all the digital needs of the practice. Even though the previous tenant was a healthcare practitioner, she wasn’t as up-to-date as Nancy’s plans require, so there’s some work to be done.
Nancy will also need to purchase five new computers, printers, and practice management software. While she’ll purchase the hardware outright, much of the software, including EHR products, is cloud-based and licensed per seat.
Nancy will use equipment financing.
Equipment for one exam room
Last but definitely not least, Nancy will need to equip the treatment rooms appropriately. Purchasing a mix of new and high-quality used items will cost approximately $100,000.
Nancy will use equipment financing.
As a business owner, every day is a new opportunity, and every day comes with a number of decisions to be made. Having a solid understanding of the many aspects of running a business will help lead you to greater success. Recognizing opportunities, and knowing how best to take advantage of them, is one of the most valuable strengths you can have as a (business owner/entrepreneur).