Lenders working with the Small Business Administration provide government-backed funding to veterinary professionals looking to acquire, open or expand a practice.
Owning a veterinary practice can deliver significant professional and financial advantages because of the autonomy and opportunities involving compensation and profits. However, substantial costs are associated with practice ownership, whether you’re buying an established clinic or building one from the ground up.
Finding the right loan to finance costs associated with acquiring or opening a practice is essential so that you can keep debt payments minimal and maximize profitability. Three of the primary options for practice owners include conventional loans, seller financing and Small Business Administration (SBA) loans. For many veterinarians looking to own a practice, SBA loans often can be the best solution.
The Benefits of SBA Loans
SBA loans are backed by a partial government guarantee through the U.S. Small Business Administration. Because the SBA guarantees 50% to 90% of the potential loan loss in the event of a business default, the risk to lenders is significantly reduced. Lenders are much more likely to issue loans, especially to startup practices or those with unproven ownership, when the government shoulders some of the risk.
Reduced risk to lenders results in easier approval for practice owners and interest rates and terms that are often more favorable to borrowers. SBA loans can be a versatile source of funding through the 7(a) and 504 programs.
Thanks to the SBA’s guarantee, loans made to veterinarians offer significant benefits. For instance:
- The underwriting process is more flexible.
- SBA loans do not need to be fully collateralized. A lack of available collateral won’t be a deal breaker.
- The down-payment requirement is minimal for most SBA loans, leaving more money for practice operations.
- Repayment terms are favorable. SBA loans of under 15 years have no prepayment penalties. Loans with longer repayment terms can offer lower monthly payments. Also, SBA loans are fully amortized, so there are no balloon payments to worry about.
Types of SBA Loans
Different SBA loan programs can be used to cover different costs associated with acquiring, opening or operating a veterinary practice. For example:
- The SBA 7(a) program provides loans of up to $5 million that can be used to acquire, expand or start a practice. SBA 7(a) loans can be used to refinance business debt; buy out partners; purchase inventory, equipment or commercial real estate; make renovations or leasehold improvements; and provide working capital.
- The SBA 504 program allows up to $5 million in loans, but they can be used only to purchase real estate or equipment, for construction costs, or to refinance real estate or equipment debt.
Is an SBA Loan Right for You?
SBA loans carry substantial benefits, including favorable borrower terms and an easier credit underwriting process, but the long approval period can be a downside for veterinarians looking for fast funding.
An SBA Preferred Lender can expedite the process by approving an SBA loan on behalf of the Small Business Administration.
More than $3.8 billion in SBA loans were distributed to veterinarians from 2008 to 2017. Out of all the industries to obtain SBA loans, veterinarians rank seventh. Veterinarians tend to have great success when seeking SBA financing as the 7(a) loan-failure rate within the veterinary industry is just 0.92%.
How SBA Loans Are Structured
The specifics of an SBA loan vary by loan type and purpose. Here’s what you can expect for different types of SBA loans earmarked for a veterinary practice:
You need a down payment of 10% of the total project cost if you’re acquiring a practice or starting one. However, if you can provide a seller’s note of 5%, your down payment for acquisition of a practice can be reduced to 5% of the project cost.
If you’re buying out a partner, you can finance up to 100% of the cost, with no down payment required.
The interest rate on an SBA loan will be set by the bank in accordance with the SBA’s rate policy.
The loan repayment term will be 10 years for startups or acquisitions that do not include the purchase of commercial real estate. For real estate purchases and loan acquisitions that include the transfer of commercial real estate, the repayment term will be 25 years. If you are acquiring a practice and the practice value exceeds the value of the transferred commercial real estate, the loan will be structured as a blended maturity loan.
How to Get an SBA Loan
The key steps for obtaining an SBA loan include:
- Determining eligibility: The SBA typically prefers to lend to companies that have been operational for at least two years, but loans to startups are possible. While you will face more challenges getting an SBA loan for a new practice, industry and business management experience can help. SBA 7(A) loans require you to demonstrate you have invested personal assets in the practice and that your practice has adequate cash flow to support loan payments.
- Ensuring you meet down-payment requirements: Down payments vary based on the SBA loan type and purpose. When purchasing a veterinary practice, you’re typically required to put down at least 10%. You will need to demonstrate that you have sufficient liquidity to make the down payment.
- Completing an SBA loan application: Certain documentation is required. You will need personal and business tax returns, details about any existing business debt, a profit and loss statement, your company’s balance sheet, a business plan, and financial records such as business bank statements.
SBA loan applications can take time to process, so don’t hesitate to start now if you believe using a loan backed by the Small Business Administration is the best approach to finance your acquisition of a veterinary practice or to fund your efforts to start, expand or operate an existing practice.
Christopher Hackney is vice president of Small Business Administration lending at First Home Bank. He serves on the National Association of Government Guaranteed Lenders’ Public Policy Committee.
Learn more: Fit Small Business provides an SBA loan calculator at http://bit.ly/2ZDK8ad.