In William Shakespeare’s Hamlet, Polonius offers his son Laertes the following advice: “Neither a borrower nor a lender be.” He wasn’t talking to 21st century ophthalmologists.
Ophthalmologists start their careers with few financial resources and significant student-loan debt. In addition, it takes plenty of capital to maintain operations — whether beginning a solo practice, buying into an existing practice or purchasing a practice of your own.
Here’s a rundown of how you can get the financing that’s right for you.
Finding a Lender
It’s best to interview three or four lenders before deciding on one. To winnow your options, consider your own specific needs and do some research about the different types of lenders.
- Lending organizations with a nationwide presence. If you live in a metropolitan area, there will be a plethora of these available to you. Bank of America, U.S. Bank and Wells Fargo, for example, have designated programs for qualified specialists. In addition to the financing itself, these programs may also give you guidance and help you build a profitable practice.
- Regional and local community banks. These can also offer sound business advice, in addition to providing loans. They can also help you establish and maintain ties within the local community where you are establishing your practice.
- Credit unions. These are another growing source of loans. Once only involved in consumer financing, they are now becoming more sophisticated — and many are entering the commercial-lending arena. Of course, if any of your friends, relatives or acquaintances have positive relationships with local bankers, ask them if they can refer you.
Interviewing the Lender
During your interviews with bankers, you will want to determine four main things:
- Can I develop a rapport with the banker?
- Can I trust them?
- Are they capable of being a partner in growing my business?
- Will their bank be able to support my lending needs?
The person that you choose as your banker must be a highly ethical person you can trust to be your advocate.
If they don’t have these qualities, then move on to the next one. If you have a good rapport with your banker, however, he or she will help you select the right type of loan option for your intended purpose. Get to know them — they’ll be a welcome friend!
Choosing the Right Borrowing Tool for the Job
Some physicians believe the only thing they need is a line of credit or simply a credit card. While tempting — some lines of credit have high limits and low interest rates — there are downsides. For instance, a line of credit may contain a covenant you pay the line off once a year.
The better solution is to finance equipment over its anticipated life span. For example, you should finance long-term assets (e.g., those with a life of more than one year) via long-term obligations, short-term assets (e.g., those with a life of less than one year) within one year.
Evaluating Your Credit
Just as you interview potential bankers, they’ll also evaluate you. Today’s standards for underwriting loans focus on the “Five C’s of Credit.”
- Character. How has the applicant handled debt obligations in the past? Expect the lender to review your credit history.
- Capacity. What is the applicant’s ability to comfortably handle loan repayment? Expect the lender to review your overall debt load as well as the consistency and sufficiency of your anticipated income.
- Collateral (when applying for secured credit). This acts as a form of security for the lender. Banks generally require collateral in the event that you cannot repay the loan. If a default in the loan terms does occur, the lender takes possession of the collateral in place of the debt. Generally, a lender will limit the term of the loan to no more than the expected life span of the collateral. For example, if a new piece of diagnostic equipment has an expected life of five years, the loan will generally be for five years.
- Capital. Does the applicant possess assets such as savings, investments and accounts receivable to pay the debt in the event that income is impaired? Expect the lender to measure the cash flow from your business and analyze the probability of successful repayment.
- Conditions. These refer to such things as the purpose of the loan (for example, acquiring a new office, adding additional equipment, etc.) and the size of the loan in relation to the intended purpose. Conditions also include the local economic condition as well as the national and international climates.
Lenders use three powerful tools to help assess the “Five C’s of Credit” and your creditworthiness.
- Credit-scoring systems. These were created in the late 1980s and today include a broad network of national agencies capable of gathering accurate credit reporting across the entire country. In the past, this type of reporting was handled by a less sophisticated network of small local credit associations, which often resulted in duplicates of accounts and other inaccuracies in information.
- Credit-scoring models. Lenders use these to predict an applicant’s probability of default and loss. Credit information is obtained from credit-reporting agencies and then run through these models. The finished product is a credit score, which is used to determine the risk the applicant poses to the lender.
- Analytical algorithms. These evaluate a business and its owner’s credit worthiness by correlating a group of selected variables to predict how the business will fare given a range of circumstances. From this information, the lender can weigh the associated risk and price the loan accordingly.
‘To Thine Own Self Be True’
A second piece of Polonius’ advice is quite appropriate for any modern discussion about lending and financing: be yourself, be true to yourself and do not engage in self-deception. Keep these quick tips handy:
- Interview several lenders and find the one that you feel comfortable with.
- Let your trusted banker be your advisor about the loan options that are right for you.
- Choose the best credit tool for your intended purpose.
- Pay your bills on time.
- Monitor your business operations to make sure your operations are profitable and your cash flow is positive.
- If you experience a problem, call your lender — it’s much easier to find your way out of a problem than allow it to become a crisis.
About the Author
Edward C. Laski, MBA, BBA, COE
Mr. Laski is a member of the AAOE Board of Directors and the Practice Administrator for San Luis Obispo Eye Associates, located in San Luis Obispo, California. Prior to joining SLO Eye, Mr. Laski spent over 40 years in the banking business, primarily in senior management positions, including President and Chief Executive Officer, Chief Lending Officer and Chief Credit Officer of California and Texas financial institutions. He also holds the designation of Certified Ophthalmic Executive, from the American Society of Ophthalmic Administrators.