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.

Medical spas are forerunner of a revolution. From Galen until now, primary method of care has been through hands and individual knowledge of a physician. But that’s changing. The default method of care is becoming technology based. In every market and time, technologies are developed that replace an individuals knowledge and skill.

Lasers, IPLs, radio frequency, infrared, personal DNA testing, Pointe Lift™, Liposolve™, Clear², PDT, telomere clipping, anti-aging drugs and a smorgasbord of other technologies in development promise to change medicine in same way that computers, jet engines, and GPS have changed aviation. Technology now enables a technician (under medical supervision) to perform effective medical treatments and places physician in an oversight roll instead of being primary practitioner. In near future, physicians will have more in common with an astronauts than Wright Brothers.

But changing technology poses very deep problems for physicians. Technology allows easy replication and scalability, forces an unimaginably steep new learning curve on overworked doctors, and eliminates many of barriers and protections that physicians have relied on in past. And it’s only going to get worse.

Consider this. The combination of markets that Surface competes in is huge (40-50 billion per year and growing), highly fragmented (individual practitioner model), completely new (technology based), and free of any meaningful national players (yet). Already there are very deep pockets investigating ways to exploit this emerging marketplace. The Wal-Marts and Home Depots of this new medical marketplace are being built.

But there’s opportunity as well. Technology opens new doors for physicians who can manage this new paradigm. That’s why a ready supply of smart and motivated physicians tired of daily grind of insurance patients are moving into marketplace and successfully competing. For first time, physicians outside current specialties of plastic surgery (cutting and stitching) and dermatology (diseases of skin) have potential to earn income of these “big money” specialties. This new market will inevitably give rise to a new specialty whose focus will be “non-surgical cosmetic medical technologies”. You can see fragmentation today. Many dermatologists now label themselves as “cosmetic” to market themselves as a subspecialty.

Hurry up and wait. You can’t get enough good information fast enough. But this is a new business and demands a huge investment of time to make right decisions. Sales reps will stream into your clinic armed with charts and graphs that go up and to right, advertisers will drop phrases like “top of mind awareness”, and you'll have a creeping suspicion that market is getting away from you. Go slow. There are a host of land mines in area and there are some that will be advising you to jump directly on them.

So, how do you build a medical spa inside your existing practice? Surface has three locations, four physicians, master aestheticians, technicians, patient coordinators, managers and office staff. Every treatment at Surface is governed by a set of proprietary protocols. As a business, we have advised dozens of individual physicians, managers, and investors about opening and operating medical spas. Be advised this is not easy, but here are a few suggestions.