Obtaining a startup loan

Students (and new practitioners) wonder: How will I be able to get a loan to start my practice when I have more than $100,000 in student loan debt and no collateral?

Fortunately, you will be able to get a loan. It happens all the time.

The trick to getting a loan is figuring out how bankers think and what they want. Actually, it's pretty simple: Bankers want to know only two things:

• How much do you want?
• How will you pay it back?

It's true that, as the old saying goes, banks lend money to people who don't need it. The bank wants to be certain that it will be able to get its money back in the worst-case scenario — if your business goes bankrupt.

The way they do this is through the four C's:

• Character. Are you a responsible financial citizen? Do you pay your bills? If you pay your personal bills, you're more likely to pay your business bills (including repayment of the bank loan).

• Capacity. Does the business have the capacity to generate enough money to pay on its obligations (read: bank loan)? The bank knows that you need money to live on, and that you have certain business expenses, but it wants to see how soon you will be in a positive cash-flow situation, with more money coming in than going out.

• Collateral. The bank expects that you, as the business owner, will contribute to the new business.

As one banker stated, "We want you to hurt as much as we do, financially speaking, if the business fails." So the bank wants collateral, in the form of cash, assets, pledges. If you don't have it, they will ask you for a co-signer, or you may be able to get an SBA guarantee (see our article on this subject in the financial prep section on StudentDC.com), or both.

• Capital. Finally, the bank looks at the assets of the business to see if, in that worst-case scenario, they can use those assets to generate money to pay back the loan.

Now that you know what the bank is looking for, here are some tactics to help you make this process easier:

1. Get your personal credit in order. Check your credit rating early in your schooling and work to repair bad credit or remove errors. A good credit score (a FICO above 650) is your best weapon in the fight to obtain a loan. Banks are more likely to loan to people with excellent credit and no money than to people with money and bad credit.

2. Keep your expectations low. You do not have to have new x-ray equipment when you're starting out. In fact, some DCs have found it advantageous to send their patients to local hospitals and clinics for x-rays.

3. Prepare a business plan. It should include financial spreadsheets with information on your startup purchases and cash flow. Most banks want three-year projections on cash flow and income.

You may also want to prepare several scenarios (a "worst case," "best case," and "expected" scenario), based primarily on your income expectations. Show the bank that you can generate a positive cash flow in your expected scenario by the end of the first year.

4. Keep track of what you are bringing to the practice. If you get a little money, buy view boxes or used tables. Contribute your own computer to the practice.

5. Know how you will answer the question of collateral. If you don't have any, show what assets you are contributing. Have a co-signer lined up.

Get pre-approved by the SBA. Don't wait until the banker asks the question to think of how you will answer.

6. Work your plan. Take your plan to several banks at the same time. Consider smaller local banks, which have a greater interest in you as a professional in the community. Talk to each and ask, "What would it take to do this deal?" Some will say no outright. Others will ask for unreasonable amounts of collateral.

The most important advice is this:

• Be prepared with a great business plan and a credit rating that is excellent, and with knowledge about the subjects above.

• Keep trying. If the first, second, third, fourth, and fifth banks say no, go to a sixth. We know DCs who have gone to as many as nine banks and received a loan from the tenth.

• Be flexible. You may need to reduce your expectations further, cutting out some assets or leasing them, waiting to buy some things until your cash flow is positive. The only things you really need to start a practice are a room, an adjusting table, and a phone.

New chiropractors obtain startup loans all the time, all across the United States and the world. If they can do it, so can you.