Increase Your Chances of Credit Approval
The factors you need to consider.
Liquidity is the lifeblood of any small business, and in today's low-interest environment, credit is an increasingly attractive tool for leveraging assets to meet liquidity needs. Since the financial crisis, though, banks are increasing their diligence and vigilance in underwriting, often requiring more collateral to support the loan and more financial information to prove your creditworthiness. This means that even small practices may need to step up their financial reporting and oversight.1 Here are some suggestions to point you toward an approval.
Solid Receivables Are Bankable Collateral
Accounts receivable (A/R), or the money your patients owe you, is an important source of collateral for most bank loans, but the amount that you will be able to borrow against those receivables depends on how well you can calculate their value. While A/R indicates future cash flow, lenders will be looking backward, focusing on your historic collection rate and debt write-offs, along with your current mix of payers.2 Consider upgrading your A/R system to one that will let you regularly monitor your receivables, track your collections and quickly identify problems--online banking can offer your practice all three of these conveniences and help get your A/R on track. Then you need a standardized collection process in place for handling overdue bills.
Think Beyond the Tax Return
Banks today are looking at more than a practice's net earnings. Increasingly, they want to see a full financial statement prepared using generally accepted account principles (GAAP). They will be considering such factors as a business's cash flow, fixed and variable expenses and debt-to-equity ratio. A certified public accountant (CPA) can not only prepare your annual statement but also provide an auditor's report that can highlight the strength of your practice and its financial reporting systems.
Banks often want to see future projections to enable them to evaluate the probability that they will be paid back. Forecasting doesn't have to be complicated, but it has to be clear and logical, based on past performance and future expectations. Expenses can be tracked on a 12-month spreadsheet using the previous year's costs, plus any known added expenses, such as an expected increase in insurance and the cost of the loan. Since revenue is based on client visits, estimate the number of patients you will need to see daily, weekly and monthly to meet those expenses.3
Meeting today's lending standards may require upgrades to your office management systems and the help of an accountant in order to increase your ability to secure favorable financing while helping you build a more efficiently managed practice.