Write the great American loan proposal

We all could use a little assistance in a recession. For many of you, a loan could help with a new building or renovation, a new equipment purchase, or just a line of credit to help with cash flow. But before the loan comes the loan proposal. You need to wow lenders with a financial presentation that'll knock their socks off. This is a sales job—maybe your first. It's like a job interview, only your job is to convince a potential lender that your practice is a good loan risk and that you'll pay the lender the principal and interest when they're due.

Here's how to write a loan proposal for the money you need right now. These meetings with lenders may be the most important meetings you have for a long time. So be prepared, answer questions, and show off your great plan to pay back your lender in order to get the green light from the people with their hands on the purse strings.

START WITH THE BASICS

Writing a loan proposal isn't easy. The last time you shed this much blood, sweat, and tears on an application, you were probably trying to get into veterinary school. Don't worry. The proposal is crucial to getting a loan, but it's just a collection of facts and figures about your clinic's finances and future. If you've studied the viability of your loan, whether it's for a line of credit or a new building project, you're already halfway done. A basic loan proposal includes:

A proposal summary. When you sit down with potential lenders for the first time, don't overwhelm them with a lot of dense verbiage. Your loan proposal's first page needs to hit all the high points: loan amount, length of the loan, preferred interest rate, who's borrowing the money, available collateral, and how the loan will affect cash flow at the practice.

Management profiles. You also need to show your lender who will make success happen. Showcase your previous management experience and medical earning power, along with that of any other owners, as well as any career highlights that will boost earnings. Include résumés for all your key management figures.

A description of the practice. Explain what services your clinic provides to the community. If you're seeking a loan from a small local bank, you may need to explain the finances of veterinary medicine. What specific work do veterinarians at your clinic do, and how much do pet owners pay for it? Walk prospective lenders through your practice's finances and its potential for growth.

Specific information about the loan requested. It's crucial that you know what you want in a loan before you walk into a bank or lender's office. Put that in your proposal summary.

Practice financial statements. Include current financial statements for the past few months, historical financial statements dating back two to three years, and prospective statements as a five-year forecast. Don't show up at the first meeting and ask what documents the lender wants. Be prepared ahead of time.

Your personal financial statements. Lenders want to see your personal financial situation along with that of the other practice owners. They want to verify that those responsible for repaying the loan are in good financial shape. Include information on your assets, retirement accounts, and debts such as your student loan and home mortgage.

Tax returns for the past three years. Banks need to see tax returns for your current business as well as those of the principals involved in this loan.

GET DOWN WITH THE DETAILS

As you prepare your loan proposal, you need to anticipate what lenders will have questions about. Make sure to include information on:

Quality of management. How successful have you and any other owners been in business? If you've never owned a practice before and are aiming to build or buy one, talk about business classes or CE you've taken and any management experiences you've had outside of practice ownership.

Risk of default. For the most part, veterinary-specific lenders look at you as a low credit risk—veterinarians are famous for paying their debts. But other lenders may not know the industry well. They'll be relying more on your specific proposal to prove you'll make your payments. Educate them about the profession and provide a financial forecast to show you'll be able to make payments.

Size of the loan relative to size of the business. If you think you might be asking for too large a loan, talk to an accountant or other financial professional. If you're running a $1 million practice and asking for money to build a $6 million-plus practice, you might be biting off more than you can chew—at least the lender will think so.

Debt-to-equity ratio. Veterinarians don't typically carry a lot of debt besides real estate. A typical ratio would be 0.25 to 1. That means the practice would have 25 cents in debt for every $1 in equity. If your ratio is much higher, you'll need to show the lender that your debt won't affect payment of this new loan.

Intended purpose of loan. Lenders want to know whether the money will go to new construction or renovation, new equipment, or a line of credit to cover you in this temporary downturn—which brings us to the next point.

Ease of sale of the practice's assets in case of liquidation. If you can't pay your loan and the bank needs to recover its money, the loan officer will need to determine whether the real estate you bought was a good buy or whether the equipment you bought can be easily sold to other veterinarians. If you default, they'll look to sell all assets involved in the loan.

The practice's liquidity position. Do you have plenty of cash or assets to convert into cash if you need to? If so, emphasize that fact.

Collateral. This is your equipment, your building, and your real estate. As long as the appraisal matches the loan, collateral's not a problem. (See "A little loan advice".)

A little loan advice

Profits. Lenders want to know that your profits have risen in the past, are expected to rise in the future, and on a chart look less like a mountain range (up, down, up, down) and more like a gentle incline.

Your past relationship with the lender. Lenders like it when you've done business with them in the past and plan to do more business with them in the future.

Loan activity elsewhere. Do you have a lot of outstanding loans with other banks and lenders? Lenders may ask you to roll your older debt into this new loan.

Loan term. Loans for building projects typically run 15 to 25 years, and equipment loans run five to 10 years. Lines of credit are usually renewed once a year. Does your plan for repayment fall in those ranges?

Expected size of revenue deposits with the lender. Banks like it when their loan customer does business with them and expects to deposit lots of money in accounts over the course of the year.

Rate of return you'll earn on assets. Banks want to know you'll make money on the loan. If you use your assets well and charge the right price for your services, you'll have a good rate of return on those assets.

All of these items should be covered in your proposal, and you should have more details at the ready in your first meeting with a potential lender.

TAKE STOCK OF TERMS

A big part of your loan proposal and your early negotiations will focus on the kind of loan you want. Maybe you won't include all the details in the proposal—you want the potential lender to tell you what he or she can offer first—but you've got to be ready to answer lenders' questions about your preferred loan type when you meet. Here are some of the factors that will affect your decision:

Down payment. The size of your down payment will determine your loan options. The best loans are obtained through conventional financing, which typically requires a down payment of 20 percent or more. The second-best deals are loans backed by the Small Business Administration (SBA) with required down payments of 10 percent or more. (That may be different for you. See "A little loan advice".) Don't have even 10 percent? Don't worry. Some lenders offer loans with small down payments or even no money down. Even in today's soft market, no-money-down loans are available if your practice brings in plenty of cash.

A little loan advice

Interest rate. So exactly how much money are you going to pay this lender to get his money now? That's a crucial question, and it's what many veterinarians base their final decision on. Banks figure their interest rates using benchmarks such as the Wall Street bank internal prime rate or the Treasury Index rate on five-year Treasury bills. But no matter what benchmark they choose, lenders are all competing for your loan. Compare interest rates once you've landed offers from three to four lenders.

Another key issue is whether the rate is fixed or variable. With a fixed rate, you're banking on rates going up in the coming years. With a variable rate, you're either figuring rates will take a dive, or you can't nab a good fixed rate. However, some lenders will set a fixed rate and then reevaluate the rate after a set period of time. If this happens, be sure the reevaluation is just a look at the rate and doesn't require an entire round of refinancing.

Costs of financing. Buyer beware: Watch the fees associated with your loan closely. They can include:

> Bank points. With bank points, you "buy down" your percentage rate by paying money up-front. Sometimes it's worth it for a lower interest rate. Sometimes it's not.

> Legal fees. This isn't necessarily your lawyer we're talking about. Loans include a fee to pay for the time the lender's lawyer spends working on the loan. You can trust the bank's lawyer, or you can pay for your own independent representation.

> SBA loan fees. If you're receiving an SBA loan, fees can be expensive. But check the new legislation first: Economic stimulus bills may temporarily suspend SBA fees on your loan.

> Appraisal fees. If you're renovating your clinic or building a new one, an expert will need to evaluate your property, your equipment, and your architectural plans and tell the bank what it's all going to be worth. You pay for this appraisal. And a lot is riding on it.

You may have presented your loan proposal and architectural drawings and been preapproved for the loan before the appraiser comes on the scene. But a too-low appraisal could scuttle your loan or force you to scramble to find additional funding. Basically, the appraisal will be the source of the bank's decision on how much to loan you for your project. (See "A little loan advice" for a tip to find a good appraiser.")

A little loan advice

> Other bank fees. Take a close look at bank fees before you decide on a loan. For instance, banks charge inspection fees on building construction loans. Here's how they work: With many construction projects, the bank pays the contractor money at the beginning of each individual building phase. Before paying money for the next phase, the bank sends an inspector to make sure everything is in order. These fees can vary. In one instance I know of, two banks charged $10,000 and $15,000, respectively, for inspection fees for the same project.

> Guarantors required. No one wants to think about bad news when a loan is being signed, but the people financially responsible for the clinic are on the hook for a lot of money if something bad happens. Don't take this lightly. If you die, the clinic fails, and the loan comes due, is your spouse's signature on the dotted line? Consider the consequences for those who sign with you. Banks may also require you to pay for life and disability insurance to cover the loan.

Loan covenants. These are all for the benefit of the bank. If you violate them, lenders have the right to call in the loan in full—though they'll seldom do that. It's not in their best interest. These covenants are really triggers that warn the bank when you're in danger of being unable to pay a loan. Loan covenants may require you to keep minimum cash balances and equity levels in your property or practice. They can restrict salary increases to you without the bank's approval. Banks may ask that, in the event of default, they get paid before any other lenders—including you. And a merger or sale of your practice may need to be vetted by the lender.

Look at these covenants carefully in your final loan documents so you can negotiate them away or be careful never to violate them. One common loan covenant that's an easy one is the requirement to share regular financial statements. You should be doing this anyway.

The loan proposal is the document that will turn your architect's colorful lines and beautiful 3-D renderings into reality. It's what will prove to the bank that your plans for state-of-the-art equipment are a good investment. If your cash flow is shrinking right now, everything is riding on your ability to show a lender why that won't always be the case. If the proposal and presentation process go smoothly, yours could be the next loan to go from proposal to approval.

Veterinary Economics Editorial Advisory Board member Gary Glassman, CPA, is a partner with Burzenski and Co. in East Haven, Conn.