PPP loans and practice finance options

Cash flow has been a major challenge for many medical practices because of a decline in patients because of the pandemic. The federal government offered Paycheck Protection Program loans last year to help businesses avoid layoffs and keep the doors open, and has now offered a second wave of loans.

Medical Economics spoke with Ben Johnston, chief operating officer of Kapitus, a small business lender, to find out who is best suited for a PPP loan and what other options are out there.

Medical Economics: Many independent medical practices have seen a drop in patient volume due to COVID. Are the PPP loans a good option for them to get through these tough times?

Ben Johnston: I think this is a great opportunity for medical practices that have seen a drop in patient volume due to COVID to stabilize their business. The capital is intended to help business owners pay employees, pay outstanding rent and other bills, invest in reopening and getting back to business. This is really a five-year loan carrying a 1% interest rate with no payment for the first 10 months. It's some of the lowest cost financing that a small business is really going to find out there in the market, and much, if not all, of that loan is likely to be forgiven just by paying your bills, and by paying your employees. So the program has tremendous benefits. Most businesses will see limited downside from taking out the loan, even if it's not completely forgiven.

ME: Are there any drawbacks to the PPP loans?

BJ: Maybe the biggest drawback is if you've already reduced your staff and your expense base, you may ultimately qualify for more money than you have expenses at this time to claim forgiveness with. The loan amount that you will receive is calculated as two and a half times historical monthly payroll. So that's about 11 weeks of payroll. Businesses have 24 weeks to accumulate expenses that can be used to document forgiveness, and eligible expenses for forgiveness include your payroll, which is really the primary focus of what the government is trying to do with this program, but also your rent, any mortgage interest that you might have, utilities, operating expenses, property damage expenses, supplier costs, and worker protection. That's all of your expenses that you would likely have in your business. And 60% of your eligible forgiveness must come from paying payroll expenses, so if you've already reduced your staff significantly, and you've reduced a lot of those expenses outstanding, it's possible that you may not receive 100% of the loan’s forgiveness opportunity. But the way I look at it, it's still a very low interest rate loan with very favorable repayment terms. If you're a struggling business that could use this capital, I really encourage you to take advantage of the opportunity.

ME: How long does it take to receive the PPP money?

BJ: So our experience in the second round is that the underwriting portion of the application process is taking longer than it did during the first draw. This is likely because there are more stringent criteria in place for businesses to qualify for the second draw. So the second draw requires that small businesses demonstrate that their revenue in at least one fiscal quarter of 2020 was down by 25% over the same fiscal quarter in 2019. So a lot of businesses struggled in the second or third quarter of 2020, and in order to qualify, they're going to need to show that one of those four quarters was down by 25%. Also, the financial institutions that are submitting applications to the SBA are first underwriting the files before submitting them, and then these files are being underwritten again by the SBA. They're really looking at that financial data and trying to determine that in fact, your business was impaired by COVID. That level of underwriting probably wasn't happening in this great detail during the first round, so we're telling customers to expect a two- to three-week process from application to receiving funds.

ME: So it doesn't matter if they took money in the first round, they are still eligible for money in the second round?

BJ: Absolutely, as long as they meet the eligibility criteria. If they took the first round loan and used it as appropriate, and you can demonstrate that you had a reduction in revenue in at least one fiscal quarter of 2020 over 2019 by that 25% amount, you're encouraged to apply. And, and that's really the second draw concept and why it was put together.

ME: Aside from the PPP loans, what other options are available to help a practice survive?

BJ: There are a number of additional loan products that will likely be available to medical professionals whose practices are open and who have maintained a decent credit rating during the pandemic. The first one is the traditional SBA loan, and those can be secured or unsecured. There are also equipment finance products that are generally secured by the equipment that's outstanding. There are term loans, which may or may not be secured, depending on the lead lender and the credit profile. There are also cashflow-based factoring products, those are generally unsecured, and generally can be provided much more quickly than some of the SBA or term loan products that are provided by banks. And then there are also revolving lines of credit that come either from bank or non-bank sources and have a pretty wide range of shapes and sizes.

ME: How does factoring work?

BJ: There are a number of different forms of factoring. But we generally do cash flow-based factoring. We look at the historical cash flows of the company, and the credit profile of the business and the borrower. And we determine what their likely capability is based on that cash flow to repay in advance. We will advance them money and purchase a future receivable from them based on the expected cash flow of that business in the future, which we determine by looking at their historical cash flow. There are other traditional factoring products where someone sells a product and has a receivable from the purchaser. And that purchaser may have a 30-, 60-, or 90-day window to pay the manufacturer of that product. Banks will often factor that receivable by advancing them a certain percentage of the amount owed and charging an interest rate on that and then being paid directly by the purchaser when it is time for that payment to be settled. So those are two different examples of factoring products that are available to small businesses in the market.

ME: What will lender typically look at when deciding whether to make a loan?

BJ: It really depends on what type of loan we're talking about here. So first I’ll address the PPP, specifically in the second draw. The first thing they're going to look for is your PPP number from the first draw. If you're applying for PPP in the second round, make sure you have that number on hand, and then they're going to ask for your driver's license to make sure that you are who you say you are. And then they're going to be looking for documents that demonstrate historical average monthly payroll. That includes payroll statements or payroll tax statements. It also includes bank statements that that can prove and demonstrate your payroll expense. In addition to that, they'll be looking for documents that demonstrate a drop of that 25% in revenue for one quarter of 2020 over the same quarter of 2019. That can include financial statements, bank statements, tax returns—quarterly tax returns are ideal, but annual tax returns can help as well.

Now, if you're looking for a bank loan, the applicant's credit profile and the business credit profile are some of the first things that a bank is going to look into. They'll be pulling credit on you. If the loan is secured by assets, they will likely need to value the collateral of that asset. And they'll be looking for financial statements and tax returns. In general, a bank loan underwriting process can take somewhere between weeks and months, in order to fulfill. And then there are a number of non-bank, cash flow-based lenders and factors out there, as well.

ME: When you're working with a private lender, does the borrower have to designate what the money can be used for? Or can it be used for any typical business expense?

BJ: When you're working with a private lender, in general, there's an understanding as to what the business need is and how the capital will be deployed. But as I like to say, at the end of the day, money is fungible. And businesses have a wide range of needs. The money can be used generally to cover those needs. Our most frequent customers are using our money to fund growth; they see an opportunity at hand and they want to take advantage of it, and often that opportunity might be fleeting. They're looking for capital quickly to be able to execute on that.

ME: Are there typical interest rates and loan terms that a medical practice will receive from a lender?

BJ: Rates really vary based on the collateral that's being asked for the term and the speed and ease of underwriting in addition to the position that the obligation. Let’s go back to some of those products that we talked about earlier and talk about where pricing might come in for some of those. So, your traditional SBA loans, those can be both secured and unsecured, and generally carry variable rates. Right now, they are generally being priced in the mid to upper single digits, and those loans are going to require a personal guarantee. Thinking about equipment finance products, these are secured by equipment, they generally carry fixed rates, and are in the mid-single digits to mid-teens, depending on your credit quality. And then your cash-flow-based factoring products that we've talked about, those are generally unsecured, most do not carry a personal guarantee, and the money can be received very quickly. And their rates are going to be a little bit higher; they'll probably start in the 20% range and go up from there. And then revolving lines of credit, from banks or non-bank lenders, rates start in the low teens and move up from there. Personal guarantees are often required for those types of loans,

ME: In general, do lenders see medical practices as a fairly safe loan partner?

BJ: I would generally say that the more consistent and stable the cash flows of any business are, the more predictable that business is and the better risk profile that that business is able to present during the underwriting process. The great thing about health care is it's a critically important industry in the United States. It's critically important to every person, every citizen, every resident of this country. It grows steadily every year and is something that we all consume on a fairly consistent basis.