Issue 2 - February 2004

Finance & Taxes by Mark Battersby
How to finance your wellness center

Despite record-low interest rates, funding to create or expand wellness centers or to acquire buildings or equipment through conventional financing organizations is difficult to acquire. Into the breach has stepped the U.S. Small Business Administration.

Yes, the Small Business Administration, or SBA, long known as the lender of last resort, has an underused program that gives many chiropractors the means to expand, modernize and compete in today’s economy.

Under the SBA’s “504 Certified Development Company Program,” chiropractors can purchase land and land improvements, modernize, renovate or convert existing facilities, purchase equipment and make improvements to property under a long-term lease.

The SBA’s 504 program may enable you to borrow up to 90-percent of the money for covered expansion needs.

The only drawback of the 504 program: It cannot be used for working capital — or for consolidating, repaying existing debt or refinancing.

Why SBA funding?

The SBA offers four key advantages for financing:

1. Bigger risks. Because the SBA assumes most of the credit risk, commercial banks are generally more willing to consider deals that might normally not be considered “bankable.” About 25 percent of all SBA loans, for example, are extended to start-up entities, which are rarely eligible for conventional commercial funding.

2. Better terms. The terms of repayment are generally more favorable than those offered with conventional commercial financing.

3. Guaranteed. The SBA estimates that more than 90 percent of all businesses in the U.S. qualify for SBA financing. And, there is no minimum loan amount, with a maximum guaranty amount of $750,000. In other words, a loan could be as high as $1 million with a 75 percent SBA guaranty — and even larger under the 504 program.

4. Low cost financing. The SBA charges a guaranty fee for term loans based on a sliding scale of 3 percent on the first $250,000; 3.5 percent on the next $250,000 and 3.875 percent on the remaining guaranty amount.

To be eligible for the 504 loans, your chiropractic practice must fall within the program’s size standards. A “for profit” practice qualifies as “small” if it has a tangible net worth of less than $7 million and an average net income of less than $2.5 million after taxes for the preceding two years.

Restrictions

The program does have a catch: For every $35,000 in 504 funding, chiropractors/borrowers must be able to show that they have created one job or retained one job that would have been lost without the project. Often it is enough to show that the project will have an alternate impact on the local economy.

If, for instance, the loan enables your chiropractic practice to update equipment and increase its ability to compete in the industry — but that modernization makes it necessary to let some employees go — the chiropractor may still get credit for the jobs retained, since those jobs would have been lost if the practice had failed.

It should be noted that while a 504 loan can be used to purchase a new building, it is not a construction loan. You must get a regular construction loan to build and the 504 loan is funded after the project is completed.

And, if you are planning to pay your 504 loan back early, be aware that there is a sliding-scale repayment penalty for the first half of the loan period.

How to get the money

Fifty percent of the 504 financing comes from a participating financial institution. That lender’s investment is generally secured by a first security interest (a lien) on the facility or equipment. Forty percent comes from Certified Development Companies (CDCs), which are local public/private partnerships organized as nonprofits. CDC loans are typically fixed-rate loans secured by a second lien and guaranteed by the SBA. The remaining 10 percent is your responsibility.

With 504, as with most SBA programs, you work with your banker to apply for the loan. Finding a bank that has experience in SBA lending is essential, and an excellent first step towards tapping into this underused, economical source of funding.

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal or accounting advice. Please consult you professional adviser for any issue related to your practice.