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Practice Owners Still Cautious About Incurring More Debt

Practitioners leery of investing in loans in fear of debt.

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Editor’s note: Dr. Mark Crootof recently finished an 18-city lecture tour sponsored by Abaxis Inc. of Union City, Calif., on recession-proofing the practice. This article is based on his talks to hundreds of hospital owners and associates about the state of their businesses.

Are lenders lending? Do veterinarians want loans?  What has changed?

These are some of the questions I am asked every day as a veterinary practice consultant.

Seeking input from a variety of people in the banking industry is the best way to get a good perspective. So, I took this question to some lenders and from their responses, I’ve concluded that the money is there and they’re willing to lend it.

Take a look at what they said.

Are Lenders Lending?

Brian Faulk of Live Oak Bank, Wilmington, Del.: “We continue to be aggressive, lending to all subsegments of the [veterinary] industry … with the exception of startup leasehold facilities and boarding facilities. Our loan funding on a month-to-month basis has remained relatively constant from year to year.”

Melissa Edwards of Bank of America Practice Solutions: “Veterinarian lending continues to deliver solid growth year over year, and the biggest hurdle is just getting the clinicians to apply.”

Judy Jennings of Matsco, Emeryville, Calif.: “What has been remarkable in the veterinary industry is the access to capital doctors still have during these tumultuous times. Financing for acquisition, expansion, start-up, debt consolidation and real estate is being approved every day.“

Tom Depping of Main Street Bank, Kingwood, Texas: “The economy appears to be stabilizing. At least things are not getting any worse. Banks are still building capital and thus very little lending is happening. Most lending that is going on is focused on lower-risk borrowers such as health care.”

What Has Changed Since the Recession Began?

Jennings: “There’s no doubt that small-business lending has tightened over the last year.  The Federal Reserve’s quarterly survey of small-business lenders has posted 11 consecutive reports of tightening lending criteria, and thus we’re all getting back to basics.

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“The basics include good personal credit report, good historical cash flow, good business planning in startup or expansion projects complete with ‘hedges’ to accommodate the possibility of slower growth.”

Edwards: “The biggest risk to growth this year has not been the lack of capital in the market, but the psychology of fear stemming from the media. Lending has tightened up, but I would argue it was too loose before and this is a needed correction.”

Faulk: “On startups, we have increased borrower equity from 10 percent to approximately 15 percent.”

Depping: “We expect the general economy to remain tight through 2010 with a very slow progression.  We feel that while GDP growth will turn positive, the lending environment will continue to make it difficult for small business.“

What does all this mean? It appears that banks are willing to lend, but there have been some changes in their rules for lending.

Practice Owners’ Take

Over the past eight months, before talks that I’ve given, I have chatted with hundreds of practice owners all over the country about their views regarding the economy. 

Bobby Spiegel of Gainesville, Fla., was concerned that “Interest rates for the loans that lenders are offering seem inflated these days, especially when looking at where home loans are at and home equity loans.”

More than three quarters of owners with whom I talked were seeing small growth, perhaps 1 to 4 percent, over the past year; however, few owners were anxious to extend themselves with new loans for their businesses.

My conclusion regarding where most veterinary practices stand would be similar to that of Fritz Wood, who recently spoke in Kansas City, Mo.:

“Eighty percent of small-animal veterinary clinics are continuing to grow, despite the current economic climate. That growth may only be 3 to 5 percent, but it’s still better than other professions,” said Wood, CPA, CFP.

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What Are Vendors Saying?

Many vendors’ concerns are summed up in a comment by Tom Smoot of T-Kennel of Kansas City, Kan.: “Sales are down. However, inquiries are the same. We feel if the banks were lending more, everything would return to normal—that [potential clients] would like to move forward but are waiting to hear back from their lender.”

Another vendor, Emory Shelly of VetRay in Arlington Heights, Ill., told me, “Our sales for 2009 are flat with 2008. January and February were very strong and then everyone started talking about how bad the economy was.  Since April, each month has been higher than the previous month. At Central Veterinary Conference in August, we had a lot of folks talking about making a purchase before the end of the year.”

Situation Summary

In conclusion, it appears that banks are willing to lend, even with the changes in regulations. But with practice owners being cautious and banks trying to build up capital, it seems that 2009 will most likely turn out to be at best a fairly static year for loans.

As an industry, we veterinarians have been spoiled about being approved for a loan.

In the past, it was extremely easy. A vet just had to show his or her veterinary license and the banks all said, “Fine, you are approved.”

Be Prepared

But times have changed. To borrow successfully, practice owners need to be better prepared. They need a quality business plan, a decent credit history and financial statements showing the ability to repay.

Generally, practices are doing better than expected during this difficult period. The exceptions are practices in states hit hardest by the burst of the housing bubble, such as Arizona, California and Florida.

Veterinary owners are still behaving somewhat cautiously and are not quick to believe the recession is over. As a profession, we are getting through this incredibly difficult time and we are all having to make changes in how we view our profession and the functions we perform.

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On the upside, it really does seem that things have turned around.

The stock market has had tremendous increases in the past six months, and housing prices are finally turning upward and inventory is finally decreasing. Also, unemployment numbers are not growing as quickly as predicted and some workers are already being rehired. All of this is good and reassuring news.

And, in the best news for our industry, over 80 percent of pet owners say they have no inclination to spend less on their pets, according to the annual American Pet Products Assn. survey this year. In fact, many of the survey’s respondents indicate they will spend more on their pets this year.

If I had to sum up everything I learned doing research for this article, it would be this: If you don’t apply, you will never get the loan. Go for it! <HOME>

Mark Crootof, DVM, is president of Crootof Veterinary Consulting of Middle Grove, N.Y., and is an editorial adviser to Veterinary Practice News.

This article first appeared in the November 2009 issue of Veterinary Practice News

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