Here's the situation: My clients, a husband-and-wife team, own a nice veterinary practice in a fairly large city. Both are
full-time practicing veterinarians and have two young children. The couple rents a 3,000-square-foot facility and gross about
$1 million annually. They have a strong desire to build their own veterinary hospital and had some plans drawn up by an architect
for a beautiful, state-of-the-art, 6,000-square-foot facility. It was about this time that my company was called in to help
improve the practice's efficiency and profitability. They told us about this new building almost as an aside.
The cost of the new building, along with rolling in existing debt, was going to be about $4 million. When we asked how they
were going to finance this project, they said their loan had already been approved. When we reviewed the loan documents, we
found that the finance company had put together $4 million with three separate 25-year SBA loans with an interest rate of
prime plus 2 percentage points adjusted quarterly. I was amazed. How were they ever going to pay off this loan, and why would
anyone loan them this kind of money under these circumstances?
Why everyone needs to talk it out
Naturally, these were the questions I asked the practice owners. They assured me that the finance company told them that the
practice could afford the debt and that everything would work out just fine. The finance company representatives had even
flown out to visit their practice and pitch the loan to reassure the practice owners that this was a good deal for them. Yet
when the practice owners spoke with their accountant about the loan, the accountant confessed to being skeptical as well.
I suggested we set up a conference call to discuss financing with the practice owners, the accountant, the finance company,
When I hung up from the
call, I was seething. The call started off cordially enough, but then I asked the finance company representative how he could
lend $4 million to practice owners who were only generating $1 million. He told me that the loan-to-value ratio was not what
he would like it to be, but it was within acceptable parameters for his company.
I interrupted him and said, "Wait a minute—do you mean to tell me that you feel it is fiscally responsible to make a $4 million
loan to people whose practice is only generating $1 million dollars a year, who have two young children, and who still have
school loans to pay off? And with a loan over 25 years at prime plus two points that adjusts quarterly?"
He hesitated and said "yes." I then asked him if he personally would take out a 25-year loan at prime plus 2 percent with
a quarterly adjustment and, after another hesitation, he answered "yes." He went on to tell me that he feels the U.S. economy
will be like China's and that interest rates would stay low.
"I think your crystal ball is better than mine," I said. "I'm just not willing to gamble on that speculation." I knew if rates
went up by one point, the owners' payments could increase by more than $29,000 a year.