The Current Market of Bank Lending
There are many reasons that an owner operator, or a future owner operator of an urgent care center, ASC, or other type of outpatient facility might wish to become familiar with the topic of bank lending. From startups, to acquisitions to expansion, understanding what you’re getting into when taking out a loan from a bank can make all the difference.
What to Know
Before pursuing a loan of your own, it would be good to become familiar with some of the terms and conditions that you might come across.
For example, understanding that senior debt would take priority over other debt you take on is important.
“Senior debt would be the loan that would have the first lean position on the business assets,” explained Tom Ethen, Vice President of Stearns Bank National Association.
This would indicate that there are different priority levels for the different financing that you take on. The amount of that financing, that which a bank is willing to lend varies from case to case.
In terms of startup businesses, banks use a combination of projected cash flow along with a valuation done by an appraiser to determine how much debt the business can support.
“Typically what is tradition in the banking side is to look at the real estate and the as-complete facility,” said Gary West, Senior Lender at BB&T. “’As-complete’ means that when we are paying the appraisal on the facility, the ASC has to provide us with a comprehensive construction budget, which we give to the appraiser. Once that building is built, the value will be ‘x.’ The appraiser comes up with a loan to value as completed in 6-12 months. We look at that value and then we look at the actual cost of it. We’ll loan against that based on the loan-to-value or the loan-to-cost.”
Strictly speaking to startups, Ethen explains that the amount leant is based largely on the financial performance of the new business.
“In the case of an existing business, we would look back at the historical financial information and make a determination as far as how much that information will support,” he continued to say. “It’s not like your typical home loan lending where you’re working off a percentage of a value of a tangible asset, it’s usually more correlated with the amount of debt the business is expected to support.”
Furthermore, according to West, a client might even choose to take out a separate loan for the equipment their facility requires. This might be an option based on the rates available for the separate loan on the equipment, which West says can be very favorable.
Typical Rates and Current Trends
Deal terms and fees can also vary from case to case, and even from bank to bank. In reference to what West typically sees, the fees charged for the loan are usually minimal.
“On our part, the bank traditionally charges a 1% origination fee, and that’s kind or our administrative and underwriting fee,” he said. “There are no additional bank fees that we charge.”
He also notes that typically the terms of the loans include a 12-18 month period of interest only.
“What happens is during that time of construction, the ASC is paying interest only on the loan while the building is being built,” West said. “Let’s say that it takes 15 months to complete the construction and get to initial occupancy. At the end of the 15 months, we are seeing trends where the client wants a five, seven or ten year term as far as the term of the note, and then the amortization of that note is usually 25 years.”
One of the trends that Ethen himself works closely in would be the Small Business (SBA) Program. This program currently provides flexibility to urgent care operators looking to start up a center.
“Essentially the program allows individuals to enter into an industry that they haven’t had prior ownership in,” he said. “One benefit to the SBA program is the fact that in a lot of banks without the SBA program, the conventional underwriting guidelines would not allow them to finance a startup business for someone in the area where they don’t already direct ownership experience historically. What the SBA brings to the table is to allow banks to deviate from the typical underwriting standards and make a loan in a situation where that loan might not otherwise be made.”
The terms of such a loan usually provide for some of the lowest capital injections as well as the longest repayment terms available. These things together make for a very viable option for a new business.
A trend that West has noticed evolving on the lender’s side is that of a more careful approach to the process of approving an ASC for a loan. In other words, there has been a deliberate approach by credit and underwriting groups to ensure the early success of the ASC.
“By early success I mean the ASC is going to have a good referral pipeline and it’ll be able to be successful right off the bat,” he said. “In the past a lot of underwriting was done in the hopes that the cases would come after the name kind of got out in the market. Now we are trying to ensure that there are doctors in the group who are part of ownership or of a referral status that will give it early success from the beginning because it’s truly about referrals and the ability of the ASC to find the pipeline of doctors willing to do their cases there.”
West attributes this trend in part to the competition present in the market that has continued to increase as new hospitals are able to provide more and more for the day-surgery types of cases.
Nonetheless, owner operators should not become hesitant to approach a bank in pursuit of a loan.
“There is a lot of noise in the market about banks not lending, being too stringent, or that banking isn’t what it was 5-7 years ago,” West said. “I will acknowledge that the environment has changed some because of the 2008 downturn, but what I would really want readers to understand is that commercial banks are ready to lend money for clients that are willing to sit down and have discussions and really work with their banker.”
It is actually sitting down with a lender and having a conversation that West says will lead to the best situation for all involved. Furthermore, finding a lender with experience in healthcare is key.
“The right approach is to pick 3-5 reputable banks and then go find the right person in the organization who understands healthcare,” he said. “A lot of banks have a lot of great lenders but they don’t necessarily have bankers that understand healthcare. That can be a real issue down the road whenever you’re trying to get a loan approved. I think there are a lot of great opportunities and banks are willing to lend money, it’s just that clients need to find the right banker and sit down and have a conversation.”
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