Considering a Veterinary Practice Loan?
Know What Lenders Look For – Before You Apply
Applying for a loan is probably not at the top of anyone’s list of favorite things to do. Sometimes applying for a loan can feel difficult and endless. When you consider a veterinary practice loan, you may wonder how to make the process easier – and what you can do to best position yourself for approval.
Different lenders have different parameters for approving a loan, placing more importance on some factors and less on others. While not all lenders are alike, there are certain common factors most banks consider. Understanding these can help you position yourself for approval in the best way possible.
Increase cash flow, eliminate credit card debt
Cash flow is one of the most important things a lender takes into account when considering a loan approval. The monthly expenditures reflected on your credit report – for example, personal mortgages, car loans and credit card bills – all affect your cash flow. High monthly bills can negatively affect your cash flow, while lower monthly bills can positively affect your cash flow.
Consider how much credit card debt you carry from month to month. If you pay your credit card balances down to zero every month, this won’t negatively affect you; if you do carry a balance, though, your cash flow can be negatively affected. To best position yourself to be approved for a veterinary loan, you’ll want to carry less than $25,000 in credit card balances from month to month.
Student and existing business loans come into play
Student loans may also affect your ability to obtain a veterinary business loan. Many lenders don’t consider the total amount of student loan debt outstanding as the deciding factor, but will look at your total monthly payment. This is where you may consider income-based repayment as an option to lower your monthly payments and improve your cash flow. Be sure to ask your lender about whether this may be necessary.
If you already own a veterinary practice, lenders will consider the monthly payments on any business loans you have. Most lenders will look for a global debt service coverage of at least 1.20x. This means that for every $1 of debt you owe – both business and personal monthly bills annualized – you have at least $1.20 to pay it with, from all your annualized income (for example, income from either your salary, practice profit, distributions and/or guarantor). Before applying for a loan, you should calculate your current ratio so you can either apply confidently or make changes to increase your chances for an approval.
Liquidity is key
Another thing to consider is your current liquidity – the amount of cash reserves you have, outside of retirement savings. Conventional veterinary lenders typically like to see at least 6 to 12 months of reserves when they consider your loan request. This means you have enough cash set aside to cover your monthly bills for 6 months to a year. If you’re a current practice owner considering a loan, a good rule of thumb is to have between 5% and 10% of the total loan amount in cash reserves. Again, every lender’s requirements are different, but having adequate cash reserves in place will put you in the best possible position with multiple lenders.
Conventional veterinary specialty financing looks at collateral a little differently than Small Business Administration lending or non-specialty financing. Goodwill in an existing practice should suffice as collateral for veterinary-specific lenders. Typically, they can lend up to 80-90% of total collections on a veterinary practice without the need for additional collateral or a seller carry-back note. This amount will vary depending on the lender and the situation; keep this in mind if you have an existing practice and are planning to apply for a loan. When you’re considering a startup loan, specialty veterinary lenders will allow you to use the future potential of goodwill, as well as equipment you purchase, as collateral.
Know before you borrow
Remember: Criteria for approving a loan may differ from bank to bank. The process may be arduous for the borrower, but knowing the criteria beforehand can help you alleviate the frustration of a loan decline before it happens and best position yourself for getting financing approved. The good news is that rates are still at historic lows, and access to veterinary-specific financing has never been easier. With this knowledge, you can prepare yourself for future success, for both the loan process and veterinary practice ownership.