No matter if you operate an independent pharmacy, veterinary, dental, optometry, medical, or other healthcare practice, one question that many clients of US Medical Funding ask is “what is more important for my practice loan, the term, or the rate?” Like most things in pharmacy financing and practice financing, the answer is “it depends,” and it depends largely on what is most important to your specialty. A pressing issue for many pharmacists, veterinarians, dentists, optometrists, doctors, and healthcare practitioners these days is their cash flow. So, today we’ll talk about what has the greatest effect on the cash flows of your pharmacy or healthcare practice!
Define Your Terms: Term, Rate, and Cash Flow
Just to be clear what we are talking about… let’s have a quick review of some financing vocabulary. The term refers to the amortization of your loan, or the schedule that you make your payments on. Shorter terms are usually associated with higher monthly payments. The rate refers to the interest rate, or how much extra you will pay over the life of the loan. Many people think the interest rate is the most important thing, but there are many factors involved. Finally, your cash flow refers to the cash that moves in and out of your business.
A Delicate Balance
In general, longer terms go with higher interest rates. On the other hand, longer terms often go with lower monthly payments—meaning more cash in your business bank account each week. This is because your pharmacy or healthcare practice lender takes a bigger risk by not asking you to repay the debt as quickly. You will often end up paying more over the life of the loan but will have more cash on hand for your business when you need it most. After all, if you could pay cash for your business debt, you wouldn’t need to pay a lender at all! If you choose a loan with a shorter loan term, your rate is likely to be lower, but your monthly payments higher. You will be able to pay your debt off sooner and may save some money over time. However, you will be obligated to pay a higher payment each month, reducing your cash flow. So, with rates being as low as they are today, depending on what you are looking to accomplish, you may want to take advantage of the longest terms available and grow your business. Today money is “on sale” and cash flow is king!
Rate and term are not the only things that are important to consider! Some loans have “balloon” options, where the rates or terms may change, and others lock you into their terms with strict covenants and restrictions on extra principal payments. When your pharmacy or healthcare practice takes off and earns enough to pay the loan back in a year or two, you may still be held to the original interest amount, just like if you paid it back over many years. If you want the option to pay your loans off early without extra prepayment penalties, sometimes a loan with a slightly higher rate would be better.
Now that you have this information, how can you choose which is more important? The answer all depends on your unique needs. Consider what factors are most important and talk your decisions over with an expert in pharmacy or healthcare practice financing. US Medical Funding has helped so many pharmacists and healthcare professionals start or acquire their practice. We would love to help you find the best financing solutions as well!