Borrowing 101: Minimize risk when taking out a loan for your practice

For better or worse, medical practices are experiencing change. While many physicians are looking to expand their practice, other physicians are seeking a divorce from their current group.

No matter which option you are personally considering, banking should be a top business consideration when weighing your transition options. The lack of available financing, whether it is for an office build-out, recruitment of physicians or the purchase of medical equipment, has strained, if not shut down, expansion. Now, with signs of a partial credit thaw appearing, lenders are slowly getting back in the game.

When negotiating a financing package, always remember the “what if” scenarios: What if the venture fails? What if the practice is unable to make its payments? What if I leave the practice while bank financing remains outstanding? You will need to understand the following banking options as they apply to the personal liability of the owner of a medical practice.

Personal guaranty. Even though the line of credit or term loan is taken out on behalf of the practice, the bank will likely require the physician-partners (and sometimes the spouses of the physician-partners) to personally guaranty the practice’s debt. You may not think twice about signing a personal guaranty for your practice; after all, you believe wholeheartedly that your practice will prosper. When you sign a personal guaranty, however, you are essentially acting as a cosigner. If the practice fails to make its payments, the bank will look to you for payment. Sometimes banks require that the partners secure the practice’s debt with personal collateral, like the physicians’ homes.

Burn off personal guaranty after a period of time. In the event the bank requires some form of personal guaranty from the physician partners, you may be able to negotiate for a cease of personal obligation after a period of time. For example, if the loan is for five years, consider asking the bank to release all personal guaranties after a period of two years, so long as there has been no default by the practice with regard to repayment of the loan during that time.

Sometimes banks require that the physician partners secure the practice’s debt with personal collateral, like the physicians’ homes.

Joint and several liability. Banks typically require each physician partner of the practice to personally sign for the entire amount of the credit (whether line of credit or term loan). While the bank can collect only the full amount of the debt, it can look to any and all of the partners for repayment if the practice is otherwise unable to repay it. Let’s say, for example, that the build-out plan requires $1.5 million and there are five partners in the practice, including you. Joint and several liability will have each partner responsible for the entire $1.5 million. If the bank collects more than $300,000 from any one partner, that partner has a right of contribution against any other partner who is subject to the joint and several liability obligation. In other words, if the bank collected $400,000 from partner number one, that partner has the right to collect $100,000 from the other partners. Of course, this pits partner against partner (or former partner), which further complicates the relationship if any of the partners leaves before the loan is paid off. This option also substantially disfavors the partner who enjoys the largest personal net worth vis-à-vis his or her colleagues.