Banks Say They’re Still Lending, But …

Despite what the public may be hearing, acquiring a loan from the bank is becoming more difficult for prospective practice owners.

Successful borrowing is still at the forefront of the minds of many practice owners. The banks are saying they are willing to lend, that all a practice owner needs to do is come on in and apply!

But owners and vendors are complaining that getting a loan is not as easy as it used to be.

An understanding of the true lending and borrowing climate is achieved only by gathering information and opinions from as many sources as possible.  The major players, and the people practice owners need to listen to the most, are practice brokers, CPAs and transactional attorneys. Not everyone shares the same view, but all their opinions are important in evaluating the lending market. So, let’s see what some experts have to say.

Divergent Views

Ed Guiducci, a Colorado attorney with Guiducci and Guiducci, described the lending environment as “challenging.”  He believes that veterinarians have had to become better managers of their practices.

Trey Cutler, another Colorado attorney, feels that the lending environment has changed, “But I would not say that my clients are having significantly greater difficulty securing loans.”

The results a given practice gets seem to heavily depend on the strengths of its local economy.

Tom McPherson, a CPA at Gatto McPherson in Santa Monica, Calif., believes it is more difficult to get financing no matter what the lenders tell you. He sees that the requirements for lending are stricter, and the practices are being scrutinized more closely before a loan is granted.

David McCormick, a consultant and Realtor specializing in valuation and ownership, gives a different spin, saying lenders are just sticking to their previous criteria. But until recently they had been more flexible, perhaps more willing to overlook certain of those criteria.

“Where they would previously extend their coverage to 100 percent purchase, the seller notes are now more prevalent,” he says.

All About the Numbers

Consultants share a similar view with those interviewed here, saying lenders have become stricter with their requirements. Consultants have found lenders watching FICA scores and paying more attention to cash flow than they previously did. 

With regards to purchases, carryback percentages have risen from 5 to 10 percent previously to as much as 15 to 20 percent now.

Guiducci points out the significance, reminding us that the “carryback promissory notes are subordinated to the primary lender’s lien, and accepting a buyer’s subordinated promissory note will put a seller’s promissory note amount at risk if the buyer was to go into bankruptcy.”

Of course, all this affects the number of transactions.

Jim Stephenson of Simmons Northeast says he’s seen a significant reduction in his office. If fact, he’s seen “about one-third reduction at Simmons nationally” by the end of last year.

He adds that lenders are “looking for more equity/security from buyers, more attention to practice growth/decline with updated profit and loss [ledgers] closer to the date of closing. SBA loans are requiring more creativity in allocations to overcome 250K limitation on good will.”

Sales Recap

With all these changes in place, it seems obvious why transaction numbers are down.

“Many practice owners are choosing to delay their sale because their other assets/portfolio took a hit and they need it to recover before they sell the asset that is producing,” McCormick says, explaining part of the reason for the drop in sales. That affects the buyer and the atmosphere of purchase in significant ways.

Guiducci has had a very different experience with transaction numbers. He didn’t see a significant drop during 2009.

“There was a push by sellers to close on the sales of their practices before Jan. 1, 2009, after the presidential election in November 2008,” he says. “This caused a very busy two months at the end of 2008.” 

He has found that a small percentage of sellers and buyers have been scared off. Most, however, are moving forward with a purchase or sale, at least when acceptable terms are on the table. 

So, people interpret the shift in the number of transactions differently. Some see it as a significant; some are less inclined to see it as a major indicator of lending practices and what the future holds. 

Looking Ahead

When I asked what we should expect for 2010, I got very different responses from different individuals.

Stevenson believes that the critical analysis of practice growth is easing up a bit. He feels that “SBA [rates] will go up but fixed [rates] will not move much.”

McPherson simply says, “Rates will gradually creep up.”

Guiducci suggests, “It is an excellent time for a practice owner to consider bringing in a practice management consultant to assist in improving operations.” 

Hiring a consultant during trying economic times might seem extravagant, but this is the best time to get a professional to assist with making tough financial decisions, someone to help you make sense of things.

Basically, it appears that even though banks and veterinary lenders say they are still lending as always, the reality is a bit different. Almost everyone interviewed for this article agreed that it is more difficult to secure loans, mostly due to banks being stricter with their requirements. Practice purchases are coming with more and greater carrybacks by sellers. Rates on loans will most likely start to ease upward this year, at least the adjustable ones. 

And, as a generalization, there are more buyers than sellers nationwide.

As the economy gradually recovers, our profession should understand that the banks and lenders are available to lend us money to purchase equipment, renovate, expand our practices and fund purchases.

But we must realize the loan approval process is stricter and lenders are not bending rules in ways to which some of us may have become accustomed.


Mark Crootof, DVM, is president of Crootof Veterinary Consulting, specializing in startups, and is an editorial adviser to Veterinary Practice News.

This article first appeared in the February 2010 issue of Veterinary Practice News


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