Today's SurgiCenter - How to Overcome Financing Hurdles

CONSTRUCTION OF A DEAL

How to Overcome Financing Hurdles

By Ken Seip

As medicine has advanced in recent years, procedures have become less painful, the process shorter and less invasive. Not necessarily so if you’re trying to finance an ambulatory surgery center (ASC) or surgical hospital.

Sometimes, finding funding can be downright difficult. Most traditional lenders are wary about lending to a start-up and insist on seeing strong financial history on an existing ASC. They want to look at the financial statements, but if you’ve never done it before, what statements can you show them? The situation is not unlike the kid just out of college; all the promise and energy in the world, yet not enough experience to convince someone to give him a job. Yet there are ways to overcome financing hurdles and get the money you need to start or expand your business.

First, you must know all there is to know about your project – not just the strengths and the opportunity, but the pitfalls and the potential shortcomings. If you test your plan before you seek financing, not only will you be able to present a realistic plan, you’ll be ready to defend and overcome any challenges.

Your business plan should include an executive summary that provides an overview of the project, a competitive analysis, market overview, financial projections and a timeline.

It will also be important to profile management and the developer. The business plan should also include a section on the project’s physician partners: number of physicians, reputation of each and the specialty mix of surgeon owners is critical information to a lender.

Lenders will also want to learn how the partners plan to work together, the types of cases expected at the center, and detailed information on legal structure and policies. Once you have finished and tested your business plan, speak to lenders for guidance on the project. In addition to providing financing, these companies can steer you to attorneys, accountants, and experts in billing, collections and accreditation.

In addition to ASC specialists, local and regional banks have begun warming to the outpatient healthcare trend. Quite often, banks can provide the most attractive rates. Yet they normally require you to sign personal guarantees, also known as recourse, and will be less flexible in regards to other terms, include skip payments and step payments that are usually attractive to start-up centers.

This is probably the single biggest issue related to ASC financing: where do your investors stand in relation to risk versus reward? If investors are willing to assume personal risk, recourse financing will come at a lower rate. If investors are sensitive to risk, trading a somewhat higher rate for no or little recourse may be the best option. So how much money will you need? Typically, a four-suite surgery center costs at least $2 million to build, equip and run for six months. (Each state and market is different. Given real estate and construction costs, surgery centers in major urban areas may cost at least 25 percent more to open.) Lenders will expect you to invest 20 percent to 25 percent of the total cost as equity. You will also need about six months in a working capital reserve or a working capital line of credit. (You should have absolutely no less than three months of working capital reserve.) So while establishing your first ASC can be challenging, it can be done less invasively, and with less pain, if you do your homework up front. And once you develop your first center and want to expand (either the existing center or by developing a new center), the process should get easier, at least when it comes to financing the project.