Lending anxiety can take a back seat in 2010, financial advisers say, as banks are making money available for qualified veterinary applicants.
However, anyone seeking 100 percent financing may have to get creative.
Credit Lines to the Rescue
These are trying times for clients. Beloved pets need health care, and the money has to come from somewhere.
One option is a credit line for people with looming veterinary bills. These lines work similarly to credit cards in that customers need to qualify and are expected to make monthly payments.
At CareCredit of Tustin, Calif., “We look at a number of different factors, including credit and payment history,” says Doug Hammond, senior vice president of sales. “Because the CareCredit card can be used in a closed network versus at the grocery store or retail chain, more people typically qualify for credit.”
Because these credit lines are for a specific purpose (medical), companies typically try to work with the clients on payment options.
Extended payment plans and low-interest or no-interest terms are possibilities. This is especially attractive to clients whose credit card interest rates are high.
“The agreement requires the client to make the specified monthly payment on time,” says Barry Trexler, senior vice president of sales and marketing at ChaseHealthAdvance. The company, headquartered in Wilmington, Del., and Tallahassee, Fla., issues starting credit lines of $5,000 to qualified owners.
“Using a product specifically designed to help consumers cover the cost of medical and dental treatment for their family and pets allows them to keep their credit cards open for other household expenses,” Trexler says.
Hammond agrees: “There are numerous benefits to both pet owners and veterinarians. For the former, the payment plans provide an option for people to plan and finance a procedure with their budget over time. They provide some financial flexibility for people who come up against an unplanned situation.
“They also allow practices to focus foremost on their primary responsibility: providing care and treatment to their patients.”
Flexibility is key during an economic downturn, when many customers are feeling the pinch of less discretionary income, rising credit card interest rates and uncooperative banks. And that’s not factoring in the emotional stress.
Because so many terms are available, staff members and veterinarians can emphasize that proper health care is less about money and more about what’s best for the comfort and well-being of the animal.
Certified public accountants say practices that were fundamentally strong before the economic fall will remain good lending candidates. But some practitioners who would have qualified under pre-recession standards will not in 2010.
Niche practitioners and those practicing in economically hard-hit areas whose revenue fell in 2009 will have a few more hoops to jump through to prove they can create the revenue necessary to validate a loan.
“Down economies [separate the] strong from the weak,” says Gary Glassman, a CPA with Burzenski & Company PC of East Haven, Conn. “Specialists and emergency hospitals are down 10 percent in 2009, but general practices report less drop in revenue, an average of 1 to 2 percent.
“This doesn’t seem like a lot, but the profession has enjoyed 5 to 6 percent annual growth for so long, it is actually taking a bit of a hit. Revenue decrease is in many cases a factor, even after practices reduced staff and took other measures to operate more lean.”
Glassman’s statistics come from Burzenski’s client database of about 100 practices nationwide. The database monitors changes in sales using invoices from 2008 and 2009. The practices’ average invoice was down 2.25 percent in the first nine months of 2009 but just 1.35 percent in the last quarter compared to 2008.
Since revenue weighs heavily on a bank’s lending decisions, Glassman predicts that the first two quarters of 2010 won’t suddenly provide a revenue lifeline but that the third and fourth quarters should provide more normalcy.
“Despite reports of an improved fourth quarter for 2009, one improved quarter isn’t enough of a trend to assume the uptick’s lifespan,” Glassman says. “The beginning of 2010 will look a lot like 2009, even if the AP Economic Stress Index improves. But I see the third and fourth quarter of 2010 getting a lot better for everyone, leveling the volatile banking industry.”
On the upside, others watching the market closely say they believe the U.S. has hit the bottom of the recession. That means veterinarians could see growth rebound this year as they’ll be among the first industries to benefit from improved consumer confidence.
“The American Recovery Act gave relief to borrowers, eliminating an upfront fee on behalf of the Small Business Association,” says David Lutch, president of Live Oak bank in Wilmington, N.C.
“When we investigate a lending opportunity, we are looking more at what the economics are in the area where the veterinarian wants to buy a practice. In the past, a loan was granted approval largely based on the owner’s financial history and the practice’s ability to general revenue alone. SBA 504 loans can be beneficial to some veterinarians, although we do not perform many here.”
A practice would qualify for an SBA 504 loan through a certified development company, or CDC, if the practice has a net worth of less than $8.5 million and an average after-taxes net profit for two years of less than $3 million. These loans can cover about
40 percent of project financing if the owner puts up 10 percent and borrows the remaining 50 percent from a traditional bank.
The catch is, the borrower must have viable collateral and create or retain one job for each $65,000 of borrowed money.
What Lenders Say
Banks report that money has been available for veterinarians throughout 2008 and 2009, but fewer loans were being made because of stricter lending guidelines and the banks’ varying focus.
“We aren’t processing as many veterinary loans as we did in the past,” says David Alvey, president of Atlantic Commercial Credit, a Rock Hill, S.C., lender. “On average, veterinary revenue has been going down in the past 21⁄2 years and there’s not as much cash flow as with other medical industries. Many other banks are talking about the availability of loans, but when a vet applies for a loan, they give them a bad deal.”
Veterinarians aren’t applying for loans as frequently either, lenders say. Part of the reason is a fear of making a financial commitment and part is because practitioners are postponing retirement and the subsequent sale of their practice as they wait for the practice’s value to increase.
“Veterinarians can’t delay retirement forever and the economy can’t stay bad forever either,” says Judy Jennings, Midwest regional manager for Matsco, an American Animal Hospital Association-recommended Wells Fargo company. “Despite the economy, we are very willing to lend to veterinarians who have shown good financial decision-making and have the potential of increasing their revenue with a purchase opportunity.”
Essentially, decisions are made case by case, says Tom McFerson, CPA, ABV, a partner with the accounting firm Gatto McFerson in Santa Monica, Calif. He says he believes banks will stay a little tighter in the first six months of 2010 but offer some relief in the second half.
“We are more cautious going into 2010,” Live Oak’s Lutch agrees. “Many banks aren’t outwardly focused on increasing their lending portfolio and are looking to focus on shoring up their current lending problems. But I believe the economy will be better in 2010, meaning increased revenue and better lending options”
Assessing the Damage
The national statistics don’t mean a lot because of regional variation in the veterinary industry. An improved economy doesn’t mean much to the practice seated in an area suffering significant economic decline or focused on emergency or specialty medicine. Regions hardest hit in the housing market and with the highest unemployment rates are better indicators of damage the economic downturn has had on a practice’s revenue.
“We’re seeing a lot more variation in the market now than in the past,” Lutch says. “One factor being looked at that wasn’t an issue before this latest economic decline is the county or city the veterinarian will be practicing in. If the local unemployment level is 28 percent, that weighs heavier on an approval decision than in a city where the unemployment rate is 4 percent.”
Often, veterinarians want to borrow as much as they’re approved for so they can use the remaining money for equipment, but new government restrictions limit bankers’ ability to lend as they did in the past. This is in place to prevent a repeat of what is seen as the cause of the poor economy: bad lending deals and the fall of the housing market.
“Saying the veterinary industry is recession-proof is a little extreme,” says Glassman, the accountant with Burzenski. “It’s not out of the question to say the industry is recession resistant. The industry as a whole has fared much better than others, largely because veterinary clients’ relationship with their pets means they’ll be more willing to cut from their budgets in other areas before [cutting animal care].”
What About Me?
Speculation for a brighter 2010 aside, it’s hard to remain optimistic if your practice has been hit hard by the recession and, despite cutting costs, you are considered a risk by banks.
“We financed a practice in mid-2008 whose local economy plummeted shortly after,” Lutch says. “The practice’s revenue dropped 30 percent in 2009. Mostly what we’re seeing is start-up practices having the most difficulty.”
CPAs say practitioners should not to be discouraged if they are not immediately approved for a loan they believe will help your practice.
Seeking a bank that caters to the veterinary industry may provide contact with lenders more knowledgeable about veterinary industry trends and earning potential.
“Early 2010 will be a gut-check time,” says Jennings, of Matsco. “Vets will need to stay efficient. When the economy turns around, viable practices will be able to grow again and have improved lending options.”
In a change from old lending practices, some banks are sharing the lending risk with practice owners looking to sell their hospital. This means the bank will ask the seller to become a third-party lender if a potential buyer doesn’t have a large enough down payment.
In the past, buyers were left to fend for themselves. Now, sellers have a vested interest in the continued success of the practice.
“Banks are looking to mitigate their risks,” Glassman notes. “Asking the seller to lend the buyer part of the loan is more than many sellers had in mind, but this is just the marketplace today. If a seller comes to the table with a marketable practice but the buyer isn’t as financially strong, a discrepancy will make or break the loan. Both buyer and seller must be strong.”
One concern that grew in 2009 and is expected to carry into 2010 is conducting business with dishonest brokers, said Alvey, of Atlantic Commercial Credit.
“Brokers bring applicants to some banks and are paid a finder’s fee,” Alvey says. “This incentive means brokers could be swayed to bring a veterinarian to a bank that pays them at a higher rate instead of the bank that will provide the best deal for the loan applicant. In today’s economy, I’d suggest doing your own footwork in finding a lender.”
“Although the availability of money to lend will become more plentiful, the manner in which banks lend money will never be the same,” Glassman says. “Every business will be forced to be watchful about how they spend their money, what vendors they use and how they staff their business.”
This article first appeared in the January 2010 issue of Veterinary Practice News