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Veterinary – Strategies For Success library

Financing Options For Your Practice Purchase

by Jim Baum | 03/31/2009 | Financing & Financial Planning , Vet

While today's economic environment is certainly challenging, there are still a number of financing options available to veterinarians transitioning to ownership through a practice purchase.

Whether you’re purchasing an existing hospital or starting up a practice in a lease space, you most likely need financing that gives you maximum flexibility and resources to meet your immediate needs and ensure long-term success. 

But before jumping into a new loan application, you’ll want to understand the advantages of owning your business property versus leasing, the financing options available to you, and the questions from the lender you’ll be expected to answer.

5 REASONS YOU SHOULD OWN YOUR BUSINESS PROPERTY

There are five important reasons for owning the property where your practice is located:

1. Property values have become more reasonable.  Recent studies have shown that commercial property values have fallen significantly since their peak. Whether you buy land or a building, the market downturn could mean some great bargains – and more practice for your investment. 

2. Preferential tax treatment. Commercial mortgages experience the same tax advantages as residential mortgages – you can deduct 100% of the mortgage interest right off the top of your business income. In addition, you can write off depreciation expenses for the office building. And later, you can take advantage of the 1031 Exchange, an IRS rule that allows the seller of a commercial property to use the proceeds of the sale to buy other like property without paying capital gains taxes. This means you can move to a larger location as your practice grows, or buy an investment with no tax penalties.

3. Long-Term Appreciation. History has shown that real estate – whether commercial or residential – appreciates over time, and this will continue over the long run despite the current crisis in the residential housing market. When you own both your practice and the underlying commercial real estate, you’re actually making two investments in one – in the value and good will of your practice, and in the long-term appreciation of your real estate property. Together they provide more options as you approach retirement.

4. Retirement Funding. When it comes time to retire, many doctors choose to sell both the practice and the real estate, investing their cash profits in a fund to finance their retirement. Others sell the practice but keep the real estate, with the new practice owner paying rent and providing ongoing monthly income. The point is, you have options based on your financial needs.

5. Favorable Rates. Rates are at historic lows for both commercial and residential real estate. Today it’s not uncommon for a monthly payment on a 25-year commercial mortgage to be the same or lower than rental payments for a similar space. In addition, only 10% down payment is required when you borrow money under the SBA loan program.

PRACTICE FINANCING OPTIONS FOR NEW OWNERS

The loan options available are based on the type of project you are engaged in. If you are buying a practice or starting a practice in a lease space, your loan is considered Practice Financing and can be structured as either a conventional practice loan or a Small Business Administration (SBA) loan.

Conventional Practice Loans

A conventional practice loan is typically financed over five to ten years, and can range from variable and fixed-rate loan packages with standard repayment terms and possible down payment requirements, to customized fixed-rate loans with up to 100% financing and flexible terms.

Conventional practice term loans are often used for practice acquisitions and start-ups in lease spaces, and offer a number of advantages to new business borrowers:

  • Lower fees and less paperwork
  • Flexible and customized repayment plans
  • Up to 100% financing options available
  • Lenders may accept the business and business assets as collateral rather than personal property and personal assets

But conventional loans have their disadvantages as well, particularly if you’re not working with a specialized lender.

  • Conventional loans through a local or regional bank can require a larger down payment.
  • Loans can be based on existing assets rather than future performance, making it difficult for new business start-ups to obtain financing.
  • There may be limited creative repayment options for borrowers with special circumstances.

SBA Practice Loans

SBA Practice loans are term loans obtained through a bank or commercial lending institution and guaranteed by the Small Business Administration.

SBA practice loans are typically financed over seven to ten years, with SBA lenders offering 85-90% financing.  The loan usually commands a 2-4% SBA guaranty fee and other closing costs, most of which can be financed into the loan. However, as part of the 2009 Economic Stimulus Package signed by the President, many of these fees now have been temporarily reduced or even eliminated for certain loan programs, making SBA financing even more attractive.

SBA Practice loans offer some key advantages over conventional practice loans:

  • A lower variable rate option
  • No prepayment penalties
  • More flexible credit underwriting guidelines

But SBA practice loans also have their limitations:

  • SBA loans almost always require at least a 10% down payment.
  • The loan fees and closing costs traditionally range from 2-4% depending on the size of the loan. However, due to the 2009 Economic Stimulus Plan, many of these fees have been temporarily waived.
  • The loan program may require personal assets and property as collateral.
  • The loans typically require more paperwork.

COMMERCIAL REAL ESTATE FINANCING OPTIONS FOR NEW OWNERS

Not all projects involve commercial real estate. However, for those that do, there are also great financing options available to those looking to buy a commercial building to start up a practice, or acquire a building with a practice purchase.

Conventional Commercial Real Estate Loans  

Conventional loans for real estate are common, but most often used for established business owners who have a track record of ownership. The Conventional Commercial Real Estate loan features down payments that can range from 20-30%, shorter repayment terms, and lower fees.  They also typically have lower rates due to the lack of risk for the lender working with an established business.

SBA Commercial Real Estate Loans:

The most common commercial real estate financing for new owners is through the SBA Loan Program. With an SBA loan, small businesses can obtain financing with a minimal down payment, as low as 10% with a fully amortized term up to 25 years. Interest rates can be the same and sometimes lower than conventional loans. And the SBA loan can provide more flexibility for real estate purchases as the seller can carry back the down payment on a promissory note. This is a common solution when a borrower wants to finance the practice with a 100% conventional practice loan, but then use the SBA loan program to finance the commercial real estate with the seller financing the 10% down payment for the SBA loan. This arrangement gives the borrower a total financing package that covers 100% of the borrower’s loan request.

The key when obtaining an SBA loan is to work with a Preferred SBA Lender such as Matsco who has been given the authority to make loan decisions on behalf of the government and can move you through the loan process quickly and efficiently.

BE PREPARED FOR LENDER QUESTIONS

To ensure the loan process is as smooth as possible, be prepared to answer these five basic questions that all lenders ask potential borrowers:

  • How much money will you need?  The lender needs to know the precise amount of funding that you need for your project, which means you’ll need to do your homework in advance by obtaining estimates for your practice purchase or start-up.
  • How will you use the money you will borrow?  For a practice acquisition, be prepared to provide the negotiated purchase price plus the working capital needed.  For start-up or expansion projects, lenders will be looking for detailed costs for the project with a specific amount for working capital as well as a contingency fee.
  • How will you pay back your lender?  Provide a business plan with a detailed pro forma that shows your monthly cash flow and ability to make payments to the bank.
  • When can you start to make payments on your loan?  You may want to request a graduated payment plan where the size of your payment gradually increases over time as your business becomes established and grows.  Be sure you’re provided a specific timetable showing exactly when and how much you will be paying month-by-month.
  •  What if your project fails?  It’s critical to be prepared with a definite exit plan or modification of your initial plan in the event you run into a problem. There can occasionally be unforeseen obstacles, especially for a hospital start-up or expansion.

ADVANTAGES OF USING A SPECIALIZED LENDER

Using a specialized healthcare lender for your acquisition saves you both time and money. Unlike most local banks, a specialized lender can combine your practice, equipment or property purchases into one loan package, providing a streamlined process with one credit application, one set of fees and one closing. A specialized lender can also provide a broader range of loan options, from short-term fixed rate loans to low variable rate mortgages.

Even in a tight economic environment like we’re experiencing today, you can still obtain the funds you need to make the transition to a new practice. With a little homework and preparation, you’ll be well on your way to closing the financial deal that will get your new practice off the ground!

Statements of opinion not necessarily endorsed by the American Animal Hospital Association or any of its subsidiaries, counsels, commissions, or agencies.

Jim Baum
As Mid-Atlantic Regional Manager for Wells Fargo Practice Finance, Jim Baum helps doctors nationwide finance their practice acquisitions, start-up projects and practice equity loans. Jim also speaks at seminars and professional schools throughout the year. He can be reached at: 800-897-2208 or jim.baum@wellsfargo.com.

All practice financing is subject to credit approval. Business Refinance Program is for business term debt only. Revolving credit and existing Wells Fargo Practice Finance debt are not eligible for consolidation.

The articles and materials on the Wells Fargo Practice Finance Web site are provided for general information only and do not constitute, nor are they intended as, a substitute for consultation with accounting, tax, legal or other professional advisors. Wells Fargo makes no representation regarding the articles available in the Strategies for Success Library or the completeness or accuracy of the information contained therein. The articles and the information contained therein may be incomplete, may contain errors or may have become out of date. Wells Fargo makes no commitment, and disclaims any duty, to update any of the articles or materials in the Strategies for Success Library. The views expressed in the articles are those of the authors alone. They may or may not reflect the views or opinions of Wells Fargo.

American Animal Hospital Association

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