What Do Lenders Look for When Financing a Dermatology Practice?
Lenders generally evaluate several factors when considering financing for a dermatology practice. The practice’s financial performance, the physician’s experience, credit history, available assets, transaction structure, and overall ability to repay the loan can all play a role.
For physicians considering dermatology practice financing, understanding these factors can help them prepare before applying for financing.
1. Credit History
A physician’s credit history can be an important part of a financing application.
Lenders may review credit history to understand how the borrower has managed previous financial obligations.
2. Practice Revenue
For an established dermatology practice acquisition, lenders may review historical revenue and collections.
Consistent revenue can help demonstrate the practice’s ability to generate cash flow after the acquisition.
3. Cash Flow
Cash flow is often more important than revenue alone.
A practice may generate substantial revenue but also have significant operating expenses. Lenders may therefore evaluate how much cash the business generates after expenses.
4. Profitability
Historical profitability can provide insight into the financial strength of an established practice.
Lenders may review profit and loss statements, tax returns, and other financial records to evaluate the business.
5. Physician Experience
The physician’s professional and business background can also be relevant.
A lender may consider the physician’s clinical experience, ownership experience, management background, and familiarity with the services being offered.
6. Down Payment and Available Liquidity
Depending on the financing structure, the physician may need to contribute some capital toward the transaction.
Lenders may also consider the borrower’s available liquidity after closing.
Maintaining sufficient cash reserves can be important because a practice may experience unexpected expenses or changes in cash flow.
7. Existing Debt
Personal and business debt obligations may be reviewed as part of the financing process.
The lender wants to understand the borrower’s existing financial commitments in relation to the proposed new debt.
8. The Practice’s Patient Base
For an acquisition, lenders may evaluate the stability of the practice’s patient base.
Factors such as patient volume, new-patient growth, referral sources, and retention can provide insight into the sustainability of the business.
9. Revenue Mix
Dermatology practices can generate revenue from medical, surgical, cosmetic, and other services.
Lenders may want to understand how the practice generates its revenue and whether the major revenue sources are consistent.
10. Equipment and Assets
The equipment included in a transaction can also be relevant.
Lenders may review the condition and value of major equipment, particularly when specialized dermatology or cosmetic equipment represents a significant portion of the practice’s assets.
11. The Purchase Price
For an acquisition, the proposed purchase price is an important part of the financing analysis.
The lender may evaluate the purchase price in relation to the practice’s financial performance and other available information.
12. Real Estate
If the transaction includes commercial real estate, the property can introduce additional considerations.
The lender may evaluate the property, its value, intended use, and the overall structure of the real estate portion of the transaction.
13. Business Plan
A business plan can be particularly useful when the physician intends to make significant changes after purchasing the practice.
Plans to add providers, expand services, purchase equipment, renovate the office, or increase capacity should be supported by realistic financial projections.
14. Debt-Service Ability
Ultimately, lenders need to determine whether the practice and borrower can reasonably support the proposed debt.
Revenue, operating expenses, cash flow, existing obligations, and the proposed loan payment can all contribute to this analysis.
Final Thought
Financing a dermatology practice involves more than simply looking at a physician’s credit score or the practice’s annual revenue. Lenders may consider the physician’s experience, credit history, practice cash flow, profitability, patient base, existing debt, purchase price, equipment, real estate, and overall financial position.
Physicians who understand these factors can prepare more effectively for the financing process and identify potential issues before submitting an application.
