There are many reasons an independent pharmacy would need a loan from First Financial Bank Pharmacy Lending.
- A loan to acquire a business. This typically includes funds to purchase the goodwill or prescription files, inventory, and working capital.
- Starting a new business. It takes a significant amount of capital to start a pharmacy in today’s environment, so obtaining a loan for this purpose is very common.
These two loan purposes (buying an existing pharmacy and starting a new store from scratch) are easy to understand and widely known within the pharmacy industry as reasons to borrow money. But did you know that loans are available for many other purposes for existing store owners besides start-up and acquisition loans?
For individuals who already own a pharmacy, there may be additional needs:
- The need for working capital to help with a growing patient base
- Funds for expansion or to purchase equipment such as robotics or other workflow efficiencies
- A desire to refinance existing debt to lower payments and improve cash flow.
It is typical for independent pharmacies to have debt with a wholesale drug supplier. This can be either long term debt or short term debt.
Long term debt would be a loan that a wholesaler made to acquire a business. Short term debt would be debt such as accounts payable which is due monthly. In some instances, these debts can cause a cash flow crunch based on the unfavorable terms of the agreement, or they are not appropriately structured. This could create a potential opportunity for the pharmacy owner to refinance these wholesaler debts to lower the payments and free up cash flow. Payments can be reduced by extending the term of the loan and possibly lowering the interest rate. This would result in improved cash flow for the business which can help the owner in a number of ways and is something that should be considered.
A person or business can apply for a conventional loan or an SBA loan. In my experience, I have found that most independent pharmacies tend to require an SBA loan. Why?
- Most of the value of a pharmacy comes from goodwill which is an intangible asset.
- Most independent pharmacy acquisitions require a significant need for working capital which is essentially unsecured resulting in a high LTV (Loan to Value), with which conventional lenders are often uncomfortable.
- An SBA loan provides the lender a guarantee of repayment for a portion of the loan if it were to default. This gives the lender a level of comfort with the lack of tangible collateral and provides additional security when evaluating the loan.
- Additionally, SBA loans typically require less of down payment, usually 10% of the total project costs vs 20%-25% for a conventional loan
- An SBA loan may also have more favorable terms such as no prepayment penalty for non-commercial real estate loans and no balloon features that would require the loan to become due at a predetermined time. This allows the small business to have debt structured adequately so they can worry about more important business tasks such as growth and profitability.
When considering a pharmacy for a loan, the first thing a bank would want to evaluate would be the cash flow of the pharmacy. The bank wants to feel assured, as would the borrower, that the business generates enough income to service the debt and have some left over for a cushion. Other factors in a credit decision are:
- The value of the business and the other collateral securing the loan.
- The bank will want to evaluate the financial strength of the individuals guaranteeing the loan and their personal credit history. Most of this can be evaluated by providing the bank with tax returns and financial statements.
When considering applying for a loan, the main thing a pharmacy owner would want to do is make sure their books are in good order. It is very common for pharmacy owners to employ accounting methods to reduce the net income and therefore reduce their tax liabilities. This can be beneficial in the short term but could prove to be a detriment if they decide to sell the business or apply for a loan. While the business may be viable, banks must rely on the income tax returns when underwriting the business.
It is essential when choosing a lender to find a person or bank you feel comfortable with. While relevant, often borrowers get hung up on interest rates. Find a lender who understands your business and can be a partner for you as you grow. It’s very beneficial to identify a lender that specializes in independent pharmacy. Many banks that don’t specialize in independent pharmacy lending often don’t understand the nuances of the business such as reimbursements, rebates, wholesaler contracts, and the need for working capital. If pursuing an SBA loan, you’ll want to be sure the bank is a preferred lender with SBA. The preferred lender status allows banks to issue their approvals and don’t require the files to be sent to SBA for approval. This can help expedite the loan process tremendously.
First Financial Bank is a national lender with preferred status that specializes in pharmacy lending – originating over $200M in pharmacy loans the last few years. With a pharmacist, pharmacy owners, and 80+ years of combined pharmacy experience on the team, we know pharmacy!