Equipment Financing Part 1

Although I have secured some healthy working capital, I still need to find someone willing to finance my equipment. Remember when I said that equipment loans would be easier to obtain because they are secured by the equipment themselves? I was wrong. I’m having a very difficult time getting approved for the amount I need to outfit my practice with all the bells and whistles I desire. Companies are either demanding a 30-40% down payment, just downright denying me, or simply ignoring me.

Even though no one has given me a formal offer letter, I am continuing to move forward with starting my practice because one lender/broker, Funding Well Capital, gave me a verbal commitment that I had been pre-approved for a $50,000 equipment loan, which will be enough to fund one exam lane, a minor procedure room, and a cheap EMR program. This company asked me to fill out a simple one-page application, and immediately gave me pre-approval. The broker avoided answering my questions about interest rates and terms, and just asked me to contact him when I was ready to proceed. The way this broker handled my request felt somewhat fishy, but no one else was really lining up at my door for my business. I’m a bit skeptical with my “pre-approval,” and am expecting them to give me a 10+% interest rate, if they even really follow through with their offer. Unfortunately, I’ll probably have to take it since my current options are so sparse.

In the mean time, I had to put in a 10% security deposit with Zeiss by September 30 to lock in my end-of-fiscal-year “discount.” I’m hoping that I will be able to get it back if I can eventually find a bank to finance the entire amount. I have also just committed to an office space lease for 5 years, which means that I’m going to have to make something work. Worse comes to worse, I will have to start with just a slit lamp and a chair, and slowly upgrade as my cashflow turns positive. Some of my close friends have also offered to give me significant loans, but I would like to avoid going that route at all costs. 

One other company did approve me for the Zeiss products, contingent on a standby letter of credit for 35% of the loan amount. What this means is that my bank needs to draft a letter guaranteeing 35% of the loan to the lender in the instance that I default.  Unfortunately, this pledge locks up my working capital, making it inaccessible. They told me that they would release this lock upon 1 year of on-time payments. However, I expect my biggest cash crunch to occur in my first year of business, and this option would probably seriously hurt my practice’s chances for survival.

I’m looking into other options as well. Now that the Small Business Jobs Act has been signed into law, I’m hoping that some community banks might be willing to give me a chance. I’m also looking into other medical specialty lenders, but am not keeping my hopes up too high.

The problem with applying for a loan with multiple lending companies is that each of them performs a hard credit inquiry. Most of you already know that your credit score can go down when a lender performs a credit check. The more credit reports that get pulled, the worse it will look.  My FICO score dropped from 773 to 764 because of 3 credit checks done on the same day. In addition to my FICO score dropping, lenders will look at the multiple inquiries, and suspect that I might be trying to sign on for too many loans, or that there may be some suspicious reason that other lenders are rejecting me.

Of course, the only reason I’m being rejected is because I’m a startup that lacks cashflow.  Many loan officers have complimented me on how strong my pro forma looks, but in the end, it’s still just a make believe financial statement. In this day and age, banks and lenders want to see hard data. I guess I understand, since historically, 80% of startups fail. I’m assuming, physician startups are now being clumped into this category as well these days. Another disadvantage for me is the fact that my previous years’ personal tax returns as a resident aren’t very impressive. People who have been in private practice for a few years have a slight upper hand because their personal tax returns will show that they had made 3 or 4 times more than I did as a resident. It doesn’t matter that our potential income will be exactly the same once we start our practice. My guess is that lenders still need some objective data to justify their decisions, so that they don’t jeopordize their own jobs in the future if something goes wrong.

It still irks me that as a physician with excellent credit, minimum monthly payment debt obligations (student loans), significant capital, and a solid business plan, I don’t stand a chance in hell to get a secured business loan, where the collateral holds half of its value even after it’s normal 7 year expected life span. Unfortunately, it’s a sign of the times. I remember one attending telling me how he obtained a loan 25 years ago just by simply walking in with a business plan and a smile. Also, lenders keep telling me that even 3 to 5 years ago, I would have had no problem securing an equipment loan. Oh well, enough of this sobbing.  It’s not going to change things.  Got to keep on truckin’.

One thing I definitely regret is my 3 credit checks in one day. They were actually all in my attempt to secure financing for a Lumenis Selecta Trio laser. Unbeknownst to me, turns out that there was no way I was going to get this loan approved. Even though I had enough cash on hand to buy this laser outright, the companies had no interest. For the first time, I wasn’t the actual problem in this situation. After I had been subjected to all these credit checks, I discovered that Lumenis has a horrible reputation with lenders.  Apparently, when times were good, the aesthetic division of Lumenis began selling all their lasers to nonmedical professionals running medical spas. Obviously, a bunch of them defaulted over the past 2 years, and Lumenis had garnered a scarlet letter in the lending industry. I wish I had known this information before I had decided to harm my credit score.  The problem was that I was trying to rush into gaining financing before the end of the fiscal year so that I could secure a 15% discount on the laser.

Well, it didn’t work out, and a laser will be on hold for now.  The Zeiss equipment is more important for me because I can always use a laser at a nearby surgicenter or use a roll on roll off laser service.

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