Medical practices are experiencing change—for better and for worse. While many physicians are looking to expand their practice, other physicians are seeking a divorce from their current group.
Regardless of whether you are looking to expand or contract your practice, banking should be a top business consideration when weighing your transition options. The lack of available financing to expand your practice—whether it is for a practice build-out, physician recruitment, or the purchase of medical equipment—has strained (and, in some cases, halted) expansion. Luckily, lenders are slowly getting back in the game and lending money in conservative industries, such as healthcare. When negotiating a financing package, always remember the “what if” scenarios:
- What if the venture fails?
- What if the practice is unable to make its payments?
- sWhat if I leave the practice while bank financing remains outstanding?
Whether your practice wants to obtain a line of credit, increase its line of credit, or obtain a term loan, you will need to understand the following banking options as they apply to the personal liability of the owner of a medical practice.
Even though the line of credit or term loan is taken out on behalf of the practice, the bank will likely require the physician-owners (and sometimes the spouses of the physician-owners) to personally guaranty the practice’s debt. You may not think twice about signing a personal guaranty for your practice—after all, you believe wholeheartedly that your practice will prosper. However, when you sign a personal guaranty, you are essentially acting as a cosigner. If the practice fails to make its loan payments, the bank will look to you individually for payment. Sometimes, banks will require that the physician-owners secure the practice’s debt with personal collateral, like personal residences.
“Burn Off” Personal Guaranty After a Period of Time
In the event the lender requires a form of personal guaranty from the physician-owners, the physician-owners may be able to negotiate that the personal obligation cease after a period of time. For example, if the loan matures after five years, consider asking the bank to release all personal guaranties after a period of two years, so long as the practice has not defaulted on loan payments during the initial two years.
Joint and Several Liability
Banks will typically require each physician-owner of the practice to personally sign for the entire amount of the debt (regardless of whether the financing is through a line of credit or a term loan). While the bank can collect only the full amount of the debt, it can seek repayment from any and all of the owners if the practice is otherwise unable to pay off the debt. For example, if build-out plans require $1,000,000 and there are five physician-owners in the practice, including you, joint and several liability will have each physician-owner responsible for the entire $1,000,000. If the bank ultimately collects more than $200,000 from any one owner, that owner has a right of contribution against any other owner who is subject to the joint and several liability obligation. Meaning, if the bank collected $300,000 from physician-owner #1, he or she has the right to collect a total of $100,000 from the other owners. This, of course, pits owner against owner (or former owner), which further complicates the relationship should one or more of the physician-owners leave before the loan is paid off. This option also substantially disfavors the physician-owner who enjoys the largest personal net worth vis-à-vis his or her partners.
An important variation of joint and several liability requires each owner to personally guarantee his or her percentage interest of the loan. Using the example of total debt of $1,000,000, each of the five owners would be responsible for $200,000 and nothing more. Meaning, the bank could only collect a maximum of $200,000 from each of the owners. This essentially shifts the risk to the bank to collect each owner’s percentage interest in the outstanding debt. It also serves as an important hedge for the physician-owner who is wealthier than his or her partners.
Several Liability with a Cap
This concept incorporates the same structure as above, but with a limit on each owner’s individual exposure, which will be less than each owner’s percentage interest in the outstanding debt. For example, if the outstanding debt is $1,000,000 and several liability for each of the five owners would be $200,000 per owner, but the bank places a cap on each owner’s personal liability at $150,000 per owner, this will effectively reduce each owner’s personal liability by $50,000 in the event the practice is unable to pay off the debt.
Guaranties After You Leave the Practice
If you are leaving your practice, you need to be aware of any and all practice liabilities for which you may be personally responsible, such as a guaranty on the practice’s debt. The fact that you and your partners may have reached an agreement in connection with your departure does not mean third parties (such as a bank) are bound by that internal-practice decision. Accordingly, if you leave the practice with debt outstanding, the best option is to request a release directly from the bank.