Whether you are starting your own private practice, wanting to expand your current medical practice, or recovering from a drop in revenue due to COVID – there will come a time when you need a cash injection to take your business to the next level. With so many financing options available, it can be difficult to know which one is right for you. From bank loans to bridging finance, in this article we unpack some of the options to consider when thinking about financing your medical practice, so you can make an informed decision & realise success as soon as possible.
Financing that is fit for purpose
By the time you start looking into financing, you will probably already have a clear idea of how the cash will be used to benefit your practice. You may have already outlined how you will use the money & what returns you expect to see in a business plan.
If you haven’t already documented your thinking, it’s probably a good time to put something on paper. To guide your planning, here are some reasons you would seek out finance :
- Start-up capital: If you are starting a new practice & require finance to secure premises, equipment & systems, employ staff & more.
- Working capital: If you want to grow your practice to create more income-generating space or need to cover salaries & day-to-day expenses during a seasonal or unexpected drop in cash flow.
- Practice expansion: If you are considering a merger &/or acquisition of another practice, or buying into or out of existing partnerships.
- Equipment: Medical equipment is costly & often requires capital or financing, but it can boost your practice revenue significantly if you are able to use the equipment to expand your services &/or ‘upsell’ patients with a supplementary service.
- Business development: Maybe it’s time to go paperless or upgrade your systems to operate as a modern connected medical practice. You may need to seek finance to fund hardware & software to make this goal a reality.
Weighing up your options
Now that you know precisely why you need financing & what it will be used for, you can start looking at what kind of finance options are available & decide which one is best for your specific requirements. Let’s look at a few options when it comes to financing:
o Bank loans
Bank loans are typically fixed-term loans – once you’ve received a lump sum, you are committed to repaying the loan over a predetermined amount of time at a set interest rate. Banks also offer overdraft facilities, revolving credit & other short-term lending products that can be useful if you have a cash flow issue over a couple of months.
Benefits: Banks can generally offer you the lowest interest rate, reducing your overall repayment amount. Once you have received the lump sum, you have the autonomy to spend the cash as you see fit without having to report back to the bank lender. Bank loans are a good option if you are seeking startup capital.
Drawbacks: There is a significant amount of paperwork & surety required to apply for a bank loan. The process can take anywhere from a few weeks to a couple of months. Generally, there is no incentive to repay the loan amount faster.
o Short term loan
While banks can also offer short-term loans, there are a host of registered credit providers that offer short-term loans. These are similar to fixed-term loans in that they are interest-bearing products, but they are typically calculated over a 3 – 12-month loan term.
Benefits: Short-term loans are a quick & straightforward way to cover seasonal or exceptional cash flow problems. The application process is usually much less onerous than a fixed-term loan from a bank.
Drawbacks: Short-term loans usually come with a higher interest rate. It’s also essential that if you are filling a gap in cash flow for example, that you are confident in your planning that you can repay the loan without further erosion to your bottom line.
o Specialised medical loan
There are a number of dedicated medical finance options available. These are sometimes a specialist division of a bank, or a ‘co-op’ financial institution where products & services are bundled in with insurance products, savings & investment products, & various lending products.
Benefits: If you are looking for start-up capital, there is some benefit to choosing a ‘one stop shop’ for all your financing needs. Some lenders offer a single facility to purchase all your assets from medical equipment to IT systems. There are also flexible repayment terms if you become a client in your private capacity.
Drawbacks: Read the fine print carefully, you may be limited to only purchasing equipment from certain suppliers or taking insurance with a specific institution. This is not necessarily a drawback, but it’s worth investigating the finer details to ensure you are making the best decisions for your business.
o Cash advance
A cash advance product can be a quick, easy way to inject capital into your business when you need it. A cash advance is a lump sum advance at a fixed rate based on your accounts receivable. What differentiates cash advances from bank loans is that you can choose to link a percentage of your repayment amount to your turnover.
For example, if you loan R100 000 over 24 months at a 20% interest rate, you know you’ll be paying R5 000 per month for the next two years. But by linking repayment to your turnover, you have the assurance that if your revenue drops, so does your repayment amount.
Benefits: This option offers medical practice owners flexibility by linking repayment to turnover, especially in uncertain times. There are also no additional fees or penalties to consider, for example, you aren’t liable for an early settlement fee if you pay the advance back sooner than the agreed term. This is an unsecured loan based on turnover, so you do not have to provide collateral. Applying for a loan is completely digital & on approval, you can access funds in less than 24 hours.
Drawbacks: Providers of cash advances are essentially ‘buying’ future receivables & practices should be in business for at least 6 months with a minimum of R30 000 per month turnover. This is not necessarily an option for a start-up medical practice.
o Private investors
A private investor is a person or company who invests their own money into a business – or in your case – a medical practice. If you are well networked, you may want to explore private equity to boost your practice &/or reduce loans from financial institutions. It is also important to note that private equity firms want to see a significant return on their investment at some point. While you don’t necessarily have to pay back the investment in monthly installments, there will be an agreement in place that either entitles them to a share of your medical practice or a lump sum payout at some point in the future.
Benefits: Depending on your relationship with the investor, it may work in your favour to have their professional input in addition to their financial backing.
Drawbacks: Remember that you are essentially ‘selling’ a portion of your business to another party. You will need to consider how much of your business you are willing to part with for the initial investment.
Now that you have determined why you need financing & what your options are, it’s a good idea to have some basics in place to apply for financing. We have already discussed your business plan, which may or may not be required, but there are a few other details (& documents) to consider:
- Your personal credit history & loans outstanding. When you are applying for a loan from a bank, your credit score will form part of the decision-making process. It’s a good idea to know your credit score beforehand.
- Affordability – ensure you have quick access to your business’s revenue over the last several months to understand whether you can afford to repay specific loan amounts.
- Commitment – fixed-term loans are often taken out over 24 months+. Consider your business in a couple of years, have you planned for growth & put it into your financial projections for the same period & beyond?
- Finding the right fit – there are numerous options available to you for financing, particularly if you are an existing medical practice that’s been operating for at least 6 months. But being in business can be unpredictable & very often, your best bet is to find a lending solution that understands this unpredictability & doesn’t penalise you for it. The right partner can make all the difference in an uncertain economic & business climate.
Healthbridge is a trusted partner to over 5 000 private medical practices throughout South Africa. We are committed to helping you run your best practice & as such, we’ve partnered with Retail Capital (A cash-advance provider) to provide a fully digital, cash advance product that, on approval, will allow you to access capital within minutes. For more information about how Healthbridge can help you with your business needs, click here.
Disclaimer: The information provided is general in nature & should not be considered professional advice. In all cases, you should consult with professional advisors familiar with your particular situation before making business, legal or any other decisions.