Obtaining A Loan Can Be Tricky
Bleak evaluations of today’s financial environment often leave veterinarians leery about risks and their ability to obtain a loan to fulfill their professional aspirations.
Lenders say that while changes have been made in the lending arena as an effect of ongoing housing market woes, the veterinary industry has maintained a good risk rating.
However, veterinarians have not been unscathed by the economy. Just six months ago, a Bayer HealthCare LLC Animal Health Division study showed that 51 percent of veterinarians reported a net decrease in patient visits over the last two years, while 42 percent said that revenues decreased in 2010 as compared to 2009.
Devise a Business Plan
The study, conducted in co-operation with Brakke Consulting and the former National Commission on Veterinary Economic Issues, measured the gap between veterinary and owner perceptions for the need for pet health care. Lenders closest to the veterinary industry say a major change in veterinarians’ ability to convey value in their services will guide the future of lending.
“Veterinarians are starting to prepare themselves, while still in school, to be practice owners,” says Travis York, senior loan officer in the Atlanta office of Live Oak Bank, based in Wilmington, N.C.
“Veterinarians can’t simply hang a shingle outside of their offices and expect clients to come; they have to be good marketers as well nowadays. This is what lenders look at when they receive a loan request. They ask, ‘Can this veterinarian convey value in his/her services? And can they differentiate themselves from the competition?’ Those with a solid business plan will not have a problem obtaining a loan.”
Housing vs. Practice
Lenders say that some veterinarians compare the housing market to that of the market for buying practices and practice real-estate. But lenders say this is an apples-to-oranges rationale that doesn’t translate.
“If it is 70 percent more difficult to get a house loan today than before the recession, it is 10 percent more difficult today to get a practice or practice real-estate loan in the same time period,” says Byron Farquer, DVM, a member of the board of directors for Veterinaryloans.com. “A healthy financial portfolio is essential to procuring a practice loan in today’s market, but the future earning ability–based on the business plan, region and client base—is the biggest point of interest.”
Still, knowledge of the home buying process can be helpful.
“Home loans can be a good reference point for veterinarians looking to invest in a practice, because a vet who is ready to buy a practice has typically already bought a home,” York says. “House and practice loans are the same as comparing a primary care practitioner to a veterinary specialist. They’re both loans, both veterinarians, but they have different interests.”
The veterinary industry was once considered recession resistant, if not recession proof. But Dr. Farquer says the housing crash led to the worst economic times the industry has experienced. High unemployment, foreclosures and general financial mayhem throughout the nation have been game-changers for veterinarians.
Types of Loan Requests
“Fewer veterinarians are making requests to expand their existing practice when compared to four years ago,” Farquer says. “In fact, more than 75 percent of loan requests by existing practitioners are for working capital.”
“Making payroll is often cited for the need for these loans. Since this request has no earning potential, or collateral, if it is approved, it is agreed to at a much higher interest rate than buying property," Farquer continues. “In 2008 and earlier, less than 10 percent of loan requests by current practice owners were for working capital loans.”
Veterinaryloans.com connects veterinarians with the top 10 veterinary lenders. If none of the top veterinary industry lenders shows interest in the request, more than 200 other lenders are on hand to evaluate the feasibility of the loan.
As of November 2011, Veterinaryloans.com processed $75 million in loan requests during the year, with more than 70 percent of applicants finding a match.
“Loan requests dominating the industry now are for start-ups,” Farquer says. “Start-ups are higher risks than acquisitions, because there isn’t an established client base, but the lack of available practices to purchase is said to be driving this increase.”
Tony Urresti, vice president of operations at ProMed Financial Inc. in Tustin, Calif., says out of all his company’s veterinary loan inquiries only 55 percent had full packages, which include real-estate and practice purchase. Out of the 55 percent, 76 percent were approved.
“Decreasing revenue trends over a three-year period are a concern,” Urresti says. “Practices need an upward trend to appeal to lenders. If decreased revenue is due to the veterinarian (owner) reducing the number of clients seen in preparation for retirement, that is a different situation than fewer clients coming through the door despite efforts to gain business.”
Urresti notes that in his experience, practice evaluations for resale have almost always met the values needed.
Certain veterinary specialties will have a more difficult time getting a loan today than in years past, lenders say. This is due to the nature of their practice and risk involved with taking on a loan agreement.
“Equine practitioners will have the most difficulty procuring a start-up loan simply because their practices are typically mobile, which means rolling collateral,” York says. “This will be more difficult to recover in the event of a loss. The difficulty equine veterinarians see is across the board, in all lending agencies.”
Mobile small animal practitioners are likely to encounter the same concerns for lending. Some companies that manufacture and sell mobile practices help veterinarians procure loans, but lenders say now, with the financial environment still shaky, is not a time many banks are eager to take a quantum leap in risk.
SBA or Conventional?
“Small Business Association (SBA) loans can take 30-60 days to make a decision,” says Bill Murray, practice solutions national sales director for Bank of America in New York City. “Most conventional loans take five business days to process. This is something some veterinarians are OK with waiting on and others aren’t.”
SBA loans tend to carry higher interest rates than conventional loans, lenders say. While options are good, veterinarians will need to determine whether the SBA is better fit than a conventional approach.
“Expect a seven- to 10-year loan offering for the cost associated with buying an existing practice and 20-25 years to finance a real-estate purchase,” Farquer says. “Conventional real-estate interest rates are averaging at 5 percent, while practice loans are in the 6-8 percent range.”
Interest rates may vary, depending on the amount of money being borrowed, credit rating and length of loan.
“Interest rates are the lowest we’ve seen in our generation,” Murray says. “If a primary care veterinarian has all of the components that would have qualified him/her for a loan before the recession, they have a solid chance of qualifying now. One of the differences may be if, before the recession, a minimum of a 650 credit score was required, it might be a required 680-690 now.”
More banks are showing interest in lending to the veterinary industry, given its low-risk status. While some banks are almost entirely dedicated to the veterinary profession, like Live Oak, and others have been lending to practitioners for decades, dedicating teams of officers specifically to the industry, others are expected to emerge in 2012 to get better-risk loans to add to their portfolio.
A more diverse group of lenders offers veterinarians more options, but not all offer guidance in time of a crisis. Consider customer service before finalizing a deal.
“I predict 2012 will show more normalization in the veterinary industry,” Murray says. “I think veterinarians will see clients more like it was before the recession and veterinarians who held off selling their practices, due to concerns for low resale or because of loss on retirement savings, will put practices on the market. Things can’t stay at a standstill forever.”