Funding your expansion
By Mark E. Battersby

Interest rates remain close to their historical lows, but financing for many chiropractic practices continues to be elusive. One problem: Lower interest rates have caused lenders and investors to be more selective.

How then, can you hope to fund the expansion of your practice?

Any quest for expansion funding must begin with an understanding of the various types of financing, where that funding may be found, and the cost of the funding.

Generally, there are two basic ways to fund expansion — debt financing and equity financing.

With debt financing, you receive capital through a loan that must be paid back. With equity financing, you get capital in exchange for part ownership in the practice — something not always permitted for chiropractic practices.

EQUITY FINANCING

Equity financing can come from a variety of sources, including the chiropractic practice itself, your pockets, or from private investors. Remember, however, keeping control of your practice is more difficult when outside investors are involved.

Where permitted, equity financing for growth or expansion is more straightforward than subordinated debt financing as the investor need only be persuaded that the expansion will increase the equity value of the practice above the price paid by the investor.

Getting expansion funding from venture capital firms is a long shot for most chiropractic practices. There are a number of other sources, however, including so-called “angel” investors, that can be tapped for equity financing.

Originally a term used to describe investors in Broadway shows, “angel” now refers to anyone who invests his or her money in an entrepreneurial venture (unlike institutional venture capitalists who invest other people’s money).

Angel investing has soared in recent years as a growing number of individuals seek better return on their money than available with traditional investment vehicles. Contrary to popular belief, most angels are not millionaires.

Angels may include service providers such as lawyers, insurance agents, or accountants. They may also be business associates you are in regular contact with, such as suppliers, patients, employees, and even competitors.

THE ESOP OPTION IS NO FABLE

Selling stock in your practice does not have to involve strangers. Selling stock to the practice’s employees through an Employee Stock Ownership Plan (ESOP) is an often overlooked and usually misunderstood option.

With an ESOP, the incorporated chiropractic practice issues new shares of stock and sells them to an ESOP. The ESOP then borrows funds to buy the stock. The chiropractic practice can use the proceeds from the stock sale to its own benefit — such as growth or expansion.

The practice repays the loan by making tax-deductible contributions to the ESOP. The interest and principal on ESOP loans are tax-deductible, which can reduce the number of pre-tax dollars needed to repay the principal by as much as 34 percent, depending on the practice’s tax bracket.

Remember, however, the tax shield does not help with S corporations since they do not pay corporate income taxes. Capital gains deferral, however, can make ESOPs attractive to these pass-through business entities.

DO-IT-YOURSELF

A surprising number of chiropractic practices today have funds available after paying their bills — including taxes. One use for those unused profits is to distribute earnings to stockholders in the form of cash dividends.

Seldom, however, are all earnings paid out as dividends. Usually a portion is kept to finance future growth.

Unfortunately, more commonly, retained earnings are often largely wishful thinking. The main consideration, obviously, is whether the practice has sufficient internal cash flows to pay for expansion outlays.

Often growth requires additional working capital to finance salaries and accounts receivable that may grow faster than payables. If this growth follows historic patterns, and is built on business relationships roughly similar (at least as to creditworthiness) as the practice’s current base, a revolving line of credit can generally be expanded to accommodate the new credit needs of the practice.

LOANS TO FUND YOUR DREAM

Raising expansion funds by borrowing allows the chiropractic practice to benefit from the principal of leverage — a technique of increasing the ratio on investment through the use of borrowed funds. As long as earnings exceed interest payments on borrowed funds, the application of leverage allows the chiropractic practice to increase the rate of return on stockholders investments. However, leverage also works in reverse.

A number of lending sources may provide other types of funding. A bank is probably the best-known source of funds for most practices.

Typically, banks are the place to go for short-term lending. Loans are usually secured by tangible assets. In other situations, however, banks often help in either of two basic ways.

• A commercial bank may help a practice increase its productivity by providing funds to acquire new equipment, machinery, vehicles and other instruments and devices; or

• A bank may help by providing working capital lines of credit to help the practice expand its cash flow volume.

UNCLE’S HELPING HAND

Often thought of as a lender of last resort, the U.S. government is actually an excellent source for a wide variety of economical financing, particularly through the Small Business Administration (SBA). Many SBA loans are for smaller sums than most banks are willing to lend.

SBA loans include:

• 7(a) loans. The biggest, and most popular SBA loan program, is the 7(a) Loan Guarantee Program. The SBA guarantees up to $750,000 or 75 percent of the total amount, which-ever is less. For loans of less than $100,000, the guarantee usually tops out at 80 percent of the total loan.

A 7(a) loan can be used for many business purposes, including real estate, equipment, working capital, or inventory. The loans can be paid back over as long as 25 years for real estate and 10 years for equipment and working capital. Interest rates are a maximum of 2.25 percent over the prime rate when the loan term is less than seven years and 2.75 percent if more than seven years.

• 504 loan program. At the top end of the SBA loan-size spectrum is the 504 Loan Program, which provides long-term, fixed rate loans for financing fixed assets, usually real estate and equipment. 504 loans are usually made through Certified Development Companies (CDCs) — nonprofit intermediaries that work with the SBA, banks, and businesses looking for financing.

If you are seeking funds of up to $750,000 to buy or renovate a building or buy some major equipment, take your business plan and financial statements to a CDC. Typical percentages for this type of package are 50 percent financed by the bank, 40 percent by the CDC, and 10 percent by the practice or its principal.

In exchange for this below-market, fixed-rate financing, the SBA expects the chiropractic practice to create or retain jobs or to meet certain public policy goals such as an Enterprise/ Empowerment Zone, a minority-owned practice or business, etc.

LOCAL FUNDING

The nearly 12,000 state regional and local economic development agencies in the United States are some of the best sources of assistance. Many of these programs are looking for businesses with proven track records that want to expand their sales.

While not always a source of expansion financing, a state’s office or agency of economic development can be a guide to regional and local funding.

Obviously, financing the growth of any chiropractic practice can be a complex affair. Funding to help grow and expand the chiropractic practice is, however, widely available to those chiropractors willing to do their homework. Comparison-shopping among lenders and for rates and terms is strongly recommended.

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 your professional advisor about issues related to your practice.