If you watch the news or read any newspaper, I know youre seeing the same discouraging financial news as I am. Mortgage foreclosures are nearing a record high. Some of the nations largest lending institutions, including Freddie Mac and Fannie Mae, experienced liquidity crises and were taken over by the federal government. The Wall Street Journal reports that 23 banks have failed in the U.S. as of early December 2008. Added to this bad news, unemployment is at its worst in 26 years.

While its true that bad financial news is being reported on a daily basis, I dont think the sky is falling. However, we all do need to be careful. Its no surprise that the tighter credit markets are moving from Wall Street to Main Street. When bank officials see widespread default at other banks, of course, theyll be nervous, too. And, the worse the markets look, the more tightfisted the bankers will tend to beeven with prosperous optometrists.

The worldwide credit system has just gone through a period of not just permissive, but loose lending practices that have led to widespread defaults by marginal borrowers. This is particularly true with residential real estate-backed loans. Now, the pendulum is swinging the other way. Banks have tightened their lending criteria dramatically, and it is harder than ever for even qualified individuals and businesses to get loans.

What can you do about it? Here are a few suggestions to help you avoid the credit crunch.


Know Your Due Dates

If you dont owe any money and dont plan to borrow, you really have nothing to worry about on the credit front. If you are like most practice owners, however, you have two types of loans: short term and long term.

Loans with longer payoffs, such as three to five years for equipment, and 20- to 30-year fixed-rate mortgages for real estate, may be good loans to have right now.

Longer payoff deadlines will allow you to ride out what has become an extremely tight credit cycle. The Federal Reserve (the Fed) is injecting massive amounts of liquidity into the banking system and the credit crunch should start to ease in late 2009 or early 2010.


Can You Renew?

In a tight market like this, you have to be cautious about your ability to renew any loan, line of credit or balloon note coming due between now and the end of 2009. Every loan you try to initiate or renew in the next 12 months will face higher scrutiny than it has over the past few yearseven if youre one of your banks best customers.

Loans held by customers with marginal credit are subject to be called and not renewedparticularly in cases of home equity or other real estate-backed loans.
For this reason, I urge you to verify the renewal dates of all your loans and lines of credit. If you have any loans that require you to renew within the next 12 months, consider speaking with your banker between 90 and 120 days before the due date to explore your options.

Dont be shocked if a previously generous lender surprises you by suddenly turning conservative. Dont take it personally; its just the tight market.

One surprise you really dont want is for your banker to ask for payment in full on a big loan you were expecting to renew. That could force you to get new financing on short notice at unfavorable terms or require you to sell assets, such as stocks or real estate, at depressed prices.


Keep Your Practice Spending in Line

Financial markets run in cycles, and I firmly believe that things will get better in a year or two. But, this is a time when you need to manage your finances wisely to avoid getting caught in the credit crunch.

Here are my four keys for how much to spend on fixed assets, such as office space and equipment:

1. Dont be afraid to use OPM (other peoples money). There is nothing wrong with a reasonable amount of business debtif you manage it properly.

2. The total of your all your leases and loan payments for patient care equipment should not exceed 4% of collected gross revenues each year. Therefore, a $600,000 practice should not spend more than $24,000 ($600,000 x 4%) per year on equipment loans and leases. Note: I recommend allocating any expenses for optical lab equipment under Cost of Goods. That will give you a more accurate picture of how much you are spending to produce and dispense a pair of glasses.

3. Cash is King in a tight credit market. So, consider financing or leasing any equipment purchase that exceeds 1% of your annual practice gross. ($600,000 x 1% = $6,000). In other words, dont go out and pay $25,000 cash for a new retina camera just because your checkbook is running a big balance that month. If you have a cash reserve exceeding one years net income, you may prefer to pay cash in such situations, but make sure that youve considered all of your options carefully before opting for such a payment.

4. A good guideline for how much to spend on office space: Total payments for all your occupancy costsprincipal, interest, insurance, taxes and upkeepshould not exceed 8% of your collected gross revenues. For example, a $600,000 practice should not spend more than $48,000 ($600,000 x 8%) per year on these five factors. The same percentage applies to those who rent.

Play It Safe

If you want to be on the safe side, make an appointment to meet face to facenot on the phonewith your lending officer at least 90 days prior to the due date of any loans you want to renew.

The key here is to give yourself time to seek alternative financing or sell assets if your bank is not willing to extend your credit.

If your credit is good, and you ask months in advance, your banker will likely smile and assure you that you are still in good standing and there will be no problem renewing that loan.

But, keep in mind that the banks circumstances (and yours) can change quickly in this environment. The credit markets could be better a few months down the road. However, they could be worse.


Meeting Your Banker

One of my resources for this article was a senior lending officer (Ill call her Jane) with Suntrust Bank. She oversees credit for high-earning doctors and lawyers in Florida.

Here is what Jane likes to see when her clients come in to apply for a loan:

Be prepared. It helps your case greatly if you are organized and appear to have a good grasp of your own finances.

Bring all your pertinent financial information:

Personal balance sheet showing what you own and what you owe.

Profit & Loss statement for your practice.

Your tax returns from the last three years.

If you dont have all this information, hold an organizational meeting with your accountant before visiting your banker.

Be honest. Bankers are pros at checking credit and analyzing financial statements, so you shouldnt try to hide anything.

Know your credit score. This is more important than ever in such a tight credit environment. Financial institutions use three main services to provide credit scores: TransUnion, Equifax and Experian. You can access all three from a variety of sources on the web. For example, www. myfico.com allows you to purchase all three credit reports for less than $50.

The median credit score in the U.S. is 723. While the criteria vary slightly from bank to bank, a score of 850 is perfect, so 750 is very good.

Janes bank makes few loans to customers who have credit scores below 700. A senior lender with another bank told me that he would consider those with credit scores of 675. Be prepared to do some explaining if your credit is 650 or less.

Be proactive. Let your banker know up front if you are having trouble paying down a loan or if 2008 was a down year for you. Explain why you are in this situation and your plan, such as cutting personal or practice expenses, for correcting the problem.

Be conservative. Understand that bankers are in a very cautious mode right now. You are going to scare them if you go in with aggressive plans to expand your business in 2009.

Dont expect 100% financing. Jane said doctors should be prepared to personally guarantee equipment loans and expect to make a down payment of 10% to 20%. The bank will help you buy something, but they wont buy it for you.

Know what kind of terms you want. Lending requires give and take. Jane likes for her clients to label each component of the loan as negotiable vs. non-negotiable in advance.

For example, the components of a $100,000 equipment loan would include the amount of your down payment, the interest rate, term of the loan, payment schedule and collateral.

Be insured. Banks want to know that the physical assets of the practice are insured as well as the individual. Many banks consider disability insurance for the doctor to be very important.


If the Bank Says No

Fortunately, there are some legitimate alternative lenders, such as ProMed (1-888-763-4626) and Matsco (1-800-326-0376) who specialize in credit for healthcare providers.

ProMed works as an advisor and facilitator for doctors seeking to borrow money for a variety of practice-related needse.g., new equipment, the acquisition of another practice or even operating expenses. Basically, ProMed compares and assembles loan packages and helps to match lenders with borrowers.

So, if your bank is playing it very conservatively, and you want to get another opinion from a lending professional who knows the medical arena, it might be worth your while to give these specialty companies a call.


Consider a Longer Payout

Once your banker tells you everything is fine, a good strategy may be to ask what kind of terms you would get if you converted an existing short-term loan to a longer term payout.

This is a good strategy for nearly everyone in the current credit environment. Longer terms allow you to conserve your practice cash, and you can always pay the loan off early as the market gets better.

For example, lets say you owe $50,000 on a note at 7% interest that requires annual renewal. You might tell your banker you want to convert that to a three- or four-year pay-off with a fixed monthly payment as a way to better manage your cash.

The downside of fixing your monthly payments for a longer period of time is that you may incur a higher interest rate. Only you can decide if that trade-off makes sense. Here are three things to consider:

1. Rates are still historically low.

2. Interest expenses for business loans are deductible.

3. Most experts expect the Fed to raise rates when the recession starts to subside.

But, by the same token, the decision to extend loan payments at a higher rate for several years requires careful analysis and depends on your ability to renew or pay off the loan. Whichever solution you opt for, make sure that it is feasible for you and your practice. If liquidity is an issue for your practice, extending the due date of your loans is one way to buy enough time to ride out this tight credit cycle.

Dr. Hayes is a frequent speaker and writer on practice finance and overhead control. He is the founder of the Hayes Center for Practice Excellence at Southern College of Optometry and the president of HMI Buying Group. He has no financial interest in any of the companies mentioned. The information contained in this article is not intended to serve as investment or legal advice.

Vol. No: 146:01Issue: 1/15/2009