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Hospital Expansion: Investing in Practice Growth

By: Gavin Shea

Upgrading your practice with the latest equipment and technology is an important way to stay competitive. But how do you know when it's time to expand your physical space and whether your practice can afford to invest in additional growth? It all comes down to the flow of your practice. Traffic flow tells you when it's time to expand, and cash flow is one key to getting you there.

Traffic flow: Knowing when it's time to expand

If your facility is limiting your potential for production, then it's time to consider expanding your hospital. There are typically two key factors that lead to the need for an expansion of your physical space:

Increased client base:

A successful marketing program, positive word of mouth, or growth in your local population can all lead to an influx of clients. It's a problem many would like to have -- so many new clients they are straining both your facility and staff. If clients are consistently waiting weeks for an appointment then it may be time to consider expanding your hospital.

Expanded service portfolio:

Perhaps you need to add a groomer or skin care specialist to your team to stay competitive, but don't have adequate space to incorporate these new services. You may want to consider expanding your facility so you can meet client demand and potentially improve your overall profitability as well.

Cash flow: Key to securing expansion financing

You will likely need a practice loan to complete your expansion project, and cash flow can be one key to attaining a flexible financing package. With a history of good practice cash flow, you can potentially obtain a loan from a specialty practice lender that is based on past performance. These lenders are known as cash flow lenders and they tend to use practice income alone as collateral, not your business or personal assets.

How do you know if you can afford an expansion loan? Here's a sample cost projection example for building a 2,000 square foot expansion. Your project may be larger or smaller, and actual costs will vary accordingly.

  • Leasehold improvements: $150,000
  • Soft costs: $25,000
  • 10% contingency: $40,000
  • Working capital: $25,000
  • Equipment/furnishings: $200,000
  • Total business loan: $440,000
  • Monthly payment: $5,338 (8% fixed over 10 years) + additional monthly rent

Calculating debt service

Can your practice manage the debt you are considering? To calculate debt service:

  • Determine the adjusted net income for the practice
  • Determine your personal debt requirements
  • Divide your income by the amount of your debts (including the practice debt service)
  • If the result is at least 1.25  your practice is likely to be able to absorb the additional amount of debt

Selecting the appropriate financing program

To give yourself maximum flexibility in repaying your debt, you may want to look for a longer-term loan with fixed rates and a graduated repayment program. For example:

If you have been in your practice for a period of time, a practice equity loan may be one way of financing your hospital expansion. By tapping into the equity you've already built into your practice, you may secure a loan that will allow you to complete a build-out of your physical space.

You may also consider an equipment loan with a competitive fixed interest rate for your technology purchases. 

About the Author

Gavin Shea is the National Director, Healthcare for Wells Fargo Practice Finance. With more than 17 years of banking experience with an emphasis in practice lending, he leads sales and marketing strategy development and implementation throughout the national footprint. His industry background offers practitioners a unique perspective as they approach some of the most important decisions in their professional lives. With more than 30 years of practice lending experience, Wells Fargo Practice Finance specializes in helping healthcare professionals acquire, start and expand their practices with various financing options and a signature Practice Success Program. Contact: gavin.m.shea@wellsfargo.com or 844-626-4317

View all articles by Gavin Shea

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All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.