Dealing With The Credit Crunch: 4 Things Every Practice Owner MUST Do Today
Read this now if you are holding short-term loans to finance equipment or real estate purchases.
As I write this article on the morning of October 29, 2008, the U.S. financial markets are in a well-documented crisis.
Real estate prices have dropped, leading to increased mortgage foreclosures. The Fed has taken over Freddie Mac and Fannie Mae.
The recent bailout of IndyMac Bank in Pasadena, California, represents the second largest bank failure in US history. Wachovia, at one time the nation’s fourth largest bank, just got taken over by Citigroup. Many other banks are having severe liquidity problems.
The Dow Jones Averages were down 40 % from just one year ago and the S&P is down by 41% over the same time. And, Congress has just finalized a questionable bailout program for Wall Street.
This is a not a doom and gloom article
Yes, there is plenty of scary news out there. But if you are looking for a reason to be optimistic, just keep reminding yourself that markets move in cycles. Most of this decade has been very strong economically and this too, shall pass.
There is even some good news for optometrists. Consumer purchases of eyewear have been surprisingly strong through the first half of 2008.
But I do want to give you a heads up. Tighter credit markets have already moved from Wall Street to Main Street. That’s because loan officers, and their bosses, get nervous when they see widespread defaults at other banks.
The more bad news they see and hear, the more tightfisted bankers tend to be. Even with prosperous optometrists.
Don’t get caught short with your loans
If you are like most practice owners, you have two types of loans: short-term and long-term. Loans with longer payoffs, such as 3 to 5 years for equipment and 20 to 30 year fixed rate mortgages for real estate are good loans to have right now in my opinion.
Why? There are two dynamics at work here I want you to understand.
One, credit has gotten tighter primarily because banks are getting stricter with their lending criteria.
The good news is, if your long-term loans are not subject to review, the credit crisis will likely pass before the loans get paid off or come up for renewal in the years ahead.
Lower rates, but tighter credit
The second dynamic is a paradox. Because the Fed is pumping new funds into the banking system, liquidity is not the issue for healthy banks. They have money to loan, and at good rates. That is, after all, how banks make their money.
That means, loans will be available for practice owners with good credit. I have even had some ODs tell me the banks are calling them looking for business.
Your personal credit history is the key
Here’s the catch. Practice owners with marginal credit are going to face more scrutiny than ever.
Loans held by customers with bad credit are subject to be called and not renewed. My banking sources tell me that is particularly true for home equity and other real estate backed loans.
For that reason, I am advising every practice owner to take these four steps today.
1. Verify your loan renewal dates
The first thing I want you to do is verify the renewal dates of all your loans and lines of credit.
If you have any loans that come due before December 31, 2008, I strongly suggest that you make an appointment talk to your banker now about your renewal options. Don’t wait until a few days beforehand like many people do.
The purpose of this exercise is to make sure your banker doesn’t surprise you and ask for payment in full on short notice on an important loan you were expecting to renew.
That could force you to come up with the cash or get new financing on short notice. That is not a situation I want you to be in.
2. Check your credit score
My banker told me that the first thing he looks at when evaluating a doctor for a loan is their credit score. The major rating services are TransUnion, Equifax and Experian. A score of 800 is perfect and 400 is very bad. My guy likes to see a score of 640 to 740.
The next thing he looks at is the health of your business. Are you profitable? How much do you owe relative to your financial and real estate assets? Do you have a good payment history on your loans?
3. Meet with your banker in person
The prudent thing to do in this market is to make an appointment to meet face to face — not on the phone — with your lending officer to review the loans you want to renew.
If your credit is good, and you ask well in advance, your friendly banker will likely smile and assure you that there will be no problem renewing that loan.
But keep in mind that the bank’s circumstances (and yours) can change quickly in this environment. Many experts are predicting that commercial credit markets will only get tighter toward the end of the year.
4. Convert short-term loans to longer payouts
Let’s say you go in to discuss renewing an equipment loan for $50,000 at 6 percent interest that comes due in December.
Once your banker tells you ‘everything is fine’, tell him you want to convert that to a three or four year payoff with a fixed monthly payment as a way to better manage your cash.
Depending on your credit rating, you may incur a higher interest rate. Those with good credit might even get a better rate.
The decision to extend your monthly payments for several years requires careful analysis. But, here are three things to consider:
1. Rates are still historically low.
2. Many experts are predicting that rates will go up as the credit crunch subsides.
3. Interest expenses for business loans are tax deductible.
Bottom line for your practice: If you are not prepared to pay off a short-term loan in full, extending the due date is one way to buy enough time to ride out this tight credit cycle. Just don’t let yourself get caught short of cash at the same time the bank is asking you to pay off a short term loan.
Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2008 Jerry Hayes, OD. Not to be reproduced without written permission of the author.
Back To Top
With the questionable state
With the questionable state of the economy, I was wondering if there is
any feedback on staff year end/Christmas Bonuses. I have previously
based bonuses on a “profit sharing approach”( not a true profit
sharing), the better the business the better the bonus. While the
numbers for this year have been consistent with last year, increased
overhead and projected business environement are weighing on my mind. I
know many businesses have cut or eliminated bonuses for this year.
I want to read the other
I want to read the other articles listed under categories.
We will posting 2-3 times per
We will posting 2-3 times per week with
new content on a variety of topics related to practice profitability
and overhead control.
All readers are invited to email me at jerry@drhayesblog.com with comments or suggestions for new topics. Jerry Hayes, OD