Veterinary loans don’t HAVE to be scary

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Veterinary loans don’t HAVE to be scary

Feel out of your depth talking the practice owner into a new piece of expensive equipment or planning your own startup or practice purchase? You’re not alone. Here’s the short answer to, “What do I need to think about when I borrow a lot of money?”
 
Jan 13, 2017

Risk is scary, and loans can be big. But think about what you want and need, shop around, and start with a basic knowledge of loans with this article. (Shutterstock)Veterinary loans are not one-size-fits-all. (And neither are lenders.) Banks offer equipment loans, real estate loans, practice purchase loans and startup loans, and they all have their own wrinkles and details you need to consider before signing on the dotted line.

Some areas to consider when shopping for a loan:

Interest rates

Fixed rates. Variable rates. Teaser rates. Sifting through offers is critical in determining the right loan for you. Here are the basics: Teaser rates are attractively low for a limited period of time (three to six months), then revert back to a normal rate for the rest of the loan term. Variable interest rates float up or down, depending on what the government does with the Prime Rate. Typically, variable rates have a ceiling and a floor, but the range can be a very wide 8 to 10 percentage points. Fixed-interest rates remain stable throughout the life of the loan, no matter what happens to the Prime Rate.

A teaser rate is just what it sounds like—an offer to entice you. A variable rate, while riskier, may offer you a lower rate (and, therefore, a lower monthly payment) initially, but the risk is always that rates will rise and so will your financing costs. A fixed rate, while safer in the long run, may cost you more up front.

If you have access to all three types of rates, your decision will come down to the length of your loan (how long you'll be on the hook for potentially fluid rates), the loan costs and your tolerance for risk.

Fully amortized vs. balloon payment

Many lenders offer two types of repayment schedules: Fully amortized loans are fully paid off—and evenly paid off—over a certain period of time. Loans with balloon payments offer lower payments with the understanding that a large payment (balloon) will be due at the end of the term.

Both types of loans have attractive elements, but both come with a share of risk. A fully amortized loan means larger monthly payments, which translates into additional stress on the practice’s cash flow. A balloon payment means lower monthly payments, but it also means a large amount due at the end of the term—at which point, your options are to refinance the loan or pay off the balloon with cash you’ve saved (neither of which can be very appealing).

So, how desperate are you for that monthly cash flow at the start of your loan, and can you stomach that balloon at the end?

Prepayment penalties

A prepayment penalty on your loan is triggered if you try to pay off your loan before a certain period of time (two to three years, typically) has passed. The penalty ranges anywhere between 1 to 3 percent of the loan balance, which is a big disincentive. If you're looking for the flexibility down the line to pay off your loan faster, think twice about a prepayment penalty.

Other details

These smaller issues, but may still sway you depending on your situation:

> Is a real estate or practice appraisal required for the loan?

> What are the loan fees?

> How much paperwork is required up front?

> How much documentation is required on an annual basis once the loan is in place?

> How long will the loan take to be processed and approved?

> Will you need to include personal collateral?

Before signing off on a loan, especially a big one for a practice purchase or startup, look those numbers square in the eye and be realistic about managing interest rates, balloon payments and all the rest. You'll be glad you took time before signing to plan for the financing you choose.

Tom McFerson, CPA, ABV, is partner at the veterinary accounting firm Gatto McFerson in Santa Monica, Calif.

Length of Loans

BEWARE the longer that the term of the loan is, the more likely something will come along that will affect your cash flow, especially if you buy a practice form a "retiring" veterinarian. I purchased a practice with a 20 year SBA loan. All well and fine. the first five (5) years we did great. then the crash of 2008. Business slowed markedly. then the previous owner and some friends of hers opened a not-for-profit, spay neuter vaccination clinic a mile down the road. Boom, 30% of the gross is gone. With eight (8) years to go, We are surviving, but not like I thought we would. My recommendations to you is to keep your debt to an absolute minimum and the terms of your loans to seven (7) years. If it won't cash flow for you with those conditions, you are taking a big risk. I did her a good turn, allowing her to buy a farm that she wanted "to retire to". I forgot, no good deed should go unpunished.