Seeking financing can be daunting, particularly if you’re not sure how lenders use the numbers. In veterinary practice lending, lenders care less about passion and more about proof of your ability to repay debt. Knowing how lenders use financial metrics can greatly help you speed up the process, as well as negotiate better interest rates using veterinary practice lending. Expanding an existing veterinary practice or opening a new location is a challenge that needs preparation of your financial health check in the competitive environment of veterinary practice lending.
Importance of Financial Metrics to Lenders
Lenders measure the potential risk involved in providing a loan to a business by using Key Performance Indicators (KPI). By reviewing these KPIs, they can determine how effectively the business is handling revenue/expenses/obligations, etc. Generally speaking, if there are strong KPIs present within a veterinary practice, the likelihood that the veterinary practice will be stable, predictable, and/or have room for future growth is greater. Having prior knowledge with respect to what lenders require from a veterinarian when applying for a loan will allow you to prepare your documentation, accordingly, thus minimizing the likelihood of unnecessary back-and-forth between a lender and the veterinarian as it relates to their loan approval process.
Cash Flow Consistency: Number One Priority
Veterinary practice lending people mostly consider the consistency of cash flow as the key figure to check on a business loan application for a vet clinic. It basically refers to the practice’s ability to generate enough steady income to cover operational costs and loan payments. In order to confirm this, lenders usually review:
- The flows of cash from month to month and year to year
- The ups and downs in sales throughout the year
- The consistency of client demand
If there are fluctuations in cash flow, a red flag will be raised even when the total annual revenue appears healthy. Veterinary practices lending having regular cash inflows are considered less risky; thus, there are more opportunities for quick approvals and lower rates of interest. One of the ways to improve your standing in the eyes of lenders is to have your profit and loss statements demonstrate the consistency of your revenue streams, for instance, from wellness plans, routine care, and preventive services.
Debt-to-Income Ratio: A Measure of Repayment Ability
The debt-to-income ratio, also known as DTI, is an evaluation of how much you owe in comparison to how much you make. This is used by lenders to ensure you will be able to make additional payments in veterinary practice lending. A lower DTI means:
- Better cash flow management
- More ability to borrow
- Lower chance of default
A high DTI ratio may delay or deny veterinary practice lending approval, as high debt may account for much of your monthly income. Paying down high-interest debt can help you significantly.
Debt-To-Equity Ratio: Assessing Financial Balance
The Debt-to-Equity Ratio indicates the balance between owner’s investment and borrowed funds in your business. Lenders tend to prefer this type of balanced structure where owners have a significant financial stake (skin in the game) in their business. A balanced debt-to-equity ratio allows for:
- A long-term commitment to the business
- Less reliance on external sources of funding (i.e., debt)
- Improved financial discipline
A high level of leverage can indicate significant risk to lenders, particularly for growing practices looking to borrow additional capital. Increasing equity by either retaining earnings or reinvesting in the business will improve the practice’s position in terms of veterinary practice lending evaluations.
Supporting Financial Documents that Lenders Expect
Lenders will expect strong KPIs to be supported by proper documentation. In the case of veterinary practice lending, lenders usually ask for:
- Profit and loss statements (2- 3 years)
- Balance sheets
- Cash flow statements
- Business and personal tax returns
Running a veterinary practice, neat and properly handled records speak of your professionalism and being prepared. On the other hand, for new clinics applying for a startup business loan, lenders will focus more on projections and the owner’s financial position, thus making documentation even more important.
How Preparation Speeds Approval
Prepared applicants are processed more quickly. In veterinary practice lending, a complete and well-presented application with easy-to-verify KPIs can speed up the process. In fact, a well-prepared application can even command better terms. Prepared applicants can also save time by limiting the need for clarifications, helping build credibility in the process.
Conclusion
A lender’s decision to lend funds for a veterinary operation depends on their consideration of three critical items: how stable and reliable the cash flow of the operation will be, the overall debt incurred by the business being applied for, and the amount of equity built up in the operation at this time. By gathering your key performance indicators (KPIs) and any supporting documentation prior to applying for a loan to purchase a veterinary operation, you will improve your chances of getting an answer relatively quickly and at an attractive interest rate; thus positioning you or your business for successive periods of growth into the future (long term).
