Everything starts with a business plan: If you don’t have one. Write it. A good business plan will help you get a handle on all of
things that get glossed over in excitement of starting a new business. It’s also a usual requirement for getting financing.Remember that this is a medical business and comes with special requirements. Non-physicians can not employ physicians, medical oversight, HIPPA compliance, and a host of other regulatory issues need to be addressed. Play fast and loose with these rules and you’re asking for trouble. (One of our local competitors in Utah was not providing adequate physician oversight. The state walked in one day, confiscated all of their technology and patient records and closed them down.) All lenders want to know how you’re going to handle these issues. ADVERTISEMENT
Financing is easy. Financing smart is hard: Speak words “medical spa” as a physician and you’re everyone’s best friend. Banks, lenders, technology companies will all have big smiles on their faces and papers in their hands, ready to lend money or finance everything you need. If you’re not a physician it’s going to be harder.
If you need money or a line of credit for needs other than technology, a bank will probably be your first stop. Banks will provide best rates but are most rigorous in investigating borrowers and have least tolerance for risk. Banks will require that you have spotless credit and that entire loan is secured. In most cases, everyone who owns 10% or more of business will be personally responsible for loan and have to provide two or more years of tax returns. Be prepared for a blizzard of paperwork. Banks will want to see financial statements, cash flow, a business plan (although they don’t read it), and have a little visit.
The bank is going to want to know what funds are intended to be used for. They want to see tangible assets that have a market and can be sold if business fails or you can’t make payments. They don’t want to hear that you need more money for marketing and advertising or salaries that don’t have any resale value.
The money that banks will lend you will take form of a loan, or a line of credit. Loans have a set schedule and payments. A line of credit is somewhat different. The idea is that bank extends a line of credit that you may draw on. Interest is paid only on amount of money that is used. However, banks usually require that entire balance is paid off and unused for one month every year to ensure that business is liquid. If you can’t meet this requirement, entire line reverts to a loan.
Some bankers are helpful and some are not. In one instance a branch manager told one of our accountants that wanted some information that “he didn’t need our business and we could just live with that”. Avoid these types if you can. A friendly banker can go a long way in securing loans and providing a little flexibility if things don’t go exactly as you planned. If you find a great banker, send him a Christmas card and some cookies once in a while.
If you are in fringe of what a bank can tolerate risk wise, they will often suggest or apply on your behalf for an SBA (Small Business Administration) loan that’s partially guaranteed by government. (www.sba.gov/financing)
Half of something is better than all of nothing: If you’re going to need more money than you have in assets, you still have a couple of options. These involve partnerships, joint-ventures, venture loans or equity.
Most start-ups involve some form of equity trade. Partnerships are a good example. Sweat equity in early stages provides ownership in lieu of payment or salary. It’s very common for entrepreneurs to take little or no money, sometimes for years, until business is on its legs. Sweat equity at this stage usually extends only to founders but may extend to badly needed partners. When we started Surface, I took more than an 80% reduction in income.
Equity: The simple rule is; more money you need and risk you entail, more equity you’re going to give up.
Angels: This is first stop for most entrepreneurs. Angel financing (also called seed money), is usually raised from friends and family or “high net-worth” individuals. In some cases you may find “Angel Groups” that meet together and look for investments. Angels are usually found a early stages of a business and are often bought out when larger investors come in.
Venture Debt: A recent surge in venture debt has made its way into market and is worth discussing. Venture debt is basically a venture loan. The lender charges a higher interest rate than banks are allowed to (often around 14%) and accepts more risk in return. In addition, you will have to give up a small percentage of your company in what are called warrants. This small percentage (usually less than 5%) allows lender to share in any potential upside. Venture debt is worth considering if you’re sure of success and you don’t want or need to give up a large equity position in you company. But you’ll still be personally responsible.
Venture Capital: When most people think of raising large amounts of money, they’re thinking of venture capital. For most start ups, venture capital is not an option. VC money has some downsides though. It is hard to get and extremely expensive. When you add up entire enchilada, you’re looking at about 80% compounding interest each year in return for that money. VC’s are looking for an investment term of three to five years and a ROI (return on investment) of 700% or more. Whew. You’re also going to loose complete control of your company and have someone constantly looking over your shoulder. There are cases where this actually makes sense. Many VC are extremely well connected and bring these resources to table.
So, now you’ve got money you need. What are you going to do with it?
