VALUATIONS / PRACTICE APPRAISAL

What Do Banks Want In a Loan Package?

By Louis M. Gatto, CPA

The goal of the loan package is to obtain the loan requested. In order for this to occur, the loan package must provide a bank the “justification” for making the loan. One of the major reasons for not receiving the loan requested is submitting an inadequate loan package. In order for the loan package to be adequate, it must contain five pieces of information which are presented below:

Information on the Borrower

A loan package must include professional and financial information about the borrower. The professional information requirement is met by providing a Curriculum Vitae. The financial information requirement is satisfied by presenting prior year tax returns and a personal financial statement. The personal financial statement lists the assets and liabilities of the borrower in order to determine net worth, and discloses your income and certain expenses.

Business Environment

The loan package must include a general overview of the business environment. A demographic study is the primary source of the environment overview (See Handout). The results of the study should be interpreted as they relate to the practice. Although the practice location is addressed by the demographic study, a discussion about the positive intangible aspects of the location and facility should also be included
The other major part of the general business overview is a discussion about competition. The location of any potential competition must be disclosed. In addition, any and all competitive advantages should be identified here.

Practice Philosophy

The loan package must convey the practice philosophy. The aspect of the loan package is not specifically identified in the Table of Contents. It is conveyed throughout the loan package in its language and supporting documents.

A practice’s philosophy is made up of its medical philosophy and management philosophy. The medical philosophy pertains to the type of medicine to be practiced and services to be performed. The type of medicine to practice determines whether the practice will be a small animal practice, an emergency practice, a surgery practice, etc. The loan package should explain the rationale behind this decision as it pertains to profitability. The type of service to be performed have a direct correlation to the type of medicine practiced. The types of services fall under the general categories of preventive care, elective care and acute care.

A practice’s management philosophy covers a broad expanse of topics from staffing policies, training policies, continuing education policies, operating policies, etc. The only facet of management philosophy formally addressed in the loan package is the portion of the operating policies related to hours of operation. The hours of operation must be addressed in order to derive the Professional Revenue and Payroll Schedules(Discussed Later). Obviously, the decision to be open five, six, or seven days a week will have a major impact on the professional revenue projections.

Proforma Projections

The most important piece of the loan package is the proforma projections. The two documents that must be included in the proforma projections are the Cash Flow of Revenue Expenses (CFRE) projection and Quarterly Cash Flows (QCF) projection.

The CFRE projection is by far the most encompassing. The first step in developing the CFRE projections is to generate professional revenue projections. This is accomplished through a detailed Professional Revenue Schedule(See Handout). After completing the Professional Revenue Schedule, a Payroll Schedule is projected based on the expected revenue and growth of the practice. In addition to the two supporting schedules listed above, many assumptions must be made to generate the CFRE Projection.

The QCF projection encompasses the information generated in the CFRE projection. In addition, it identifies any other cash outlays in order to determine total cash flow for the time period projected.

Loan Proposal

The loan proposal consists of the actual loan request, a description of how the loan proceeds will be used, and the source of repayment (See Handout). The loan request is based primarily on the results of the Proforma Projections.

The source of repayment describes how the loan will be repaid. Unless the loan is guaranteed outside the practice, the Proforma Projections must provide proof that the loan can be repaid from operating cash flow.

Conclusion:

The five areas discussed above encompass the heart of the loan package. The loan package must address these areas adequately to provide a bank the support to make a loan. An effective way to envision the loan package is as an organized picture of your practice. The picture includes a financial snapshot as well as a management and marketing snapshot. A bank looks at this picture as a whole and decides whether or not to make the loan.

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