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Small Business Administration
This article by By Terry Flanagan, DC, DABCO, MPH, MBA first appeared in ACA News

News Release – Small Business Administration

Washington DC, (Oct 2007) In Fiscal 2007, the Small Business Administration (SBA) approved a total of $20.6 billion in loans. This $20.6 billion was spread over 110,000 small businesses. One third of this money went to start-ups and one third went to minority borrowers. SBA programs loaned more money in 2007 than they did in 2006 and the amount loaned has more than doubled since 2000.

Encouraging Small Business
As the comedian Yakov Smirnoff would say, “What a country”. And he would be right. No other country does as much to encourage small business development like the United States. The powers that be want entrepreneurs like you to open or buy a business. They want you to get into a business so much they have set up a department just to help you get started. The department is the Small Business Administration and they are waiting for your application.

This is wonderful you say. You want to open a practice or buy a practice and there is money – apparently a lot of money – available. So what do you have to do to get it? You know there’s probably going to be an application of some sort and maybe some financial information they need....but hey, they just loaned out 20.6 billion dollars to people just like you. How hard can it be?

As it turns out, it’s not that awfully hard. As you suspected, you will need to fill out an application and you will need financial information. It’s also very helpful if you know how the program works. So let’s start there.

First off, the SBA does not actually loan you any money. What they do is provide a guarantee to an SBA lender (a commercial bank) to help you secure a loan. With the government securing the loan, the commercial bank is more likely to take a chance on your success if you purchase a practice (risky) or if you plan to start a new practice (riskier).

Two Types of Loan Programs
There are two types of SBA loan programs. The first is the 7(a) loan program. This program loans money to finance the purchase of a practice, which will have assets that are both tangible and intangible. This means the lender will look at both the tangible hard assets you are buying (furniture, fixtures and equipment) as well as the soft intangible assets (expected future cash flow, patient files and credit worthiness of the borrower) when they make their loan determination.

The SBA 7(a) loan size starts at $25,000 and is limited to a total of $2 million dollars. The 7(a) program interest rate is usually 2 to 2.25 point over prime and is usually structured over a 10 year pay back period. The good news is it can be used to finance up to 100% of the cost for professional practices and the longer payback period eases your cash flow burdens.
Here’s what the loan will look like. Let’s say you have found a practice you like.

After the income statement has been adjusted to reflect true cash flow to the owner, the numbers look like this:

$185,000 Discretionary Income (Cash flow to the owner)
- $60,000 Salary the SBA lender looks at (i.e., what it costs you to live before you pay off the loan)
$125,000 You can afford $125,000 in free cash flow
x 1.25 Coverage ratio (allows a debt cushion)
$100,000 = Maximum annual debt service

A loan will cost you about $16,000 per $100,000 you borrow (Interest rate of 10.21%).
So the buyer can afford a loan of about $625,000 paid over a ten year period.

As a sanity check, lets see what happens if you borrow $425,000 to buy this practice.

$185,000/12 = $15,417 Monthly Discretionary Income
$ 60,000/12 = $5,000 (minus) Salary to the owner
$425,000@10.21/120 = $5,666 (minus) Monthly payment on loan
$4,751 Free cash flow for other expenses
The second type program is the 504 loan program. This type of loan may be only used to acquire tangible assets including real estate and equipment, based on their appraised values. The total amount of this loan can be up to $6 million and will be based on appraised value. The 504 loan can be used with the 7(a) loan if you are buying a practice and the building, as long as you are using the building for the practice. 504 loans are usually structured over a 25 year pay back period.

What It You Need to Apply
After reading all this, you know you’re ready to go ahead. You’ve decided you want a SBA 7(a) loan to get into your own practice and begin your professional career. To qualify for a loan, you are going to fill out the application and get your financial information together. Here’s what you are going to need:

1. Three years of tax returns
2. A resume outlining your experience in business as well as your experience in the industry.
3. A pro forma. This is a document outlining the income and expense analysis of the practice. It will also show expected cash flow and salary requirements of the borrower. This can be part of your business plan (which the lender might require you to have) or a stand alone document.
4. Personal credit history. The lender will pull your report. You need to make sure it is as good as it can be.
Sounds pretty simple doesn’t it? You do have to do some planning and have your financial information in order. All in all, it’s not that bad. It is no more complicated than the loan requirements of a commercial lender. And as a new business, your chances of getting the money are better with a SBA guaranteed loan.

There is help available. Go to the website for more information. Books can be found in the library explaining the loan process. Your practice management group should have someone available to help you through the processes. Professional practice brokers are familiar with SBA loans and can pre-qualify you for a loan or help you find a practice that has been pre-approved for SBA financing.

The small print: Only owner-operator businesses are eligible, must be a US citizen or Resident Alien, must be 21 and must have cash flow to meet debt service, owner’s income and provide a cushion. Liquidity can’t exceed SBA guidelines. SBA loan is not assumable.

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