Make debt work for you
Gone are the days when money grew on the trees growing in the soil of the financial crisis of 2008. The Fed has been steadily raising interest rates and while more boring to read about on Sunday Morning than catching up on your mimosa intake, it’s important. Especially when you’re in independent practice and don’t have a mega health system war chest.
So here’s the deal
As of this morning, plain-vanilla bank term loans sit between 6.54% and 11.7% APR, according to the Kansas City Fed’s fourth-quarter small-business survey. Why Kansas City? Well their BBQ get overlooked a lot, so we figured why not give them a shoutout.
SBA 7(a) paper, once the low-cost darling, now floats at prime 3–6.5%. That’s 10.5% to 14% variable or 12.5% to 15.5% fixed.
Secured equipment financiers advertise teaser rates, but the real-world tickets track 7% to 10%+ depending on credit, term, and how soft the resale is on that new MRI system you just had to have since Dr. Davies got one last year.
Short-term, interest-only bridge money meant to span a build-out or payer-mix hiccup has settled in the 9% to14% range. Still strictly variable and still amortization-free.
Ok, great, lots of numbers with percent signs. So what?
So, your rate determines how much it costs you to finance the thing you are buying, since you don’t have a Scrooge McDuck vault of gold coins. It also is going to have an impact on your Debt Service Coverage.
That’s this guy: DSCR = Net Operating Income / Annual Debt Service.
>1.5 and you’re in growth territory and doing just fine
1.2–1.5 and it may be time to break out the antacids
< 1.2 and you chase the antacids with something much stronger
Here’s how it could play out and what to do about it
You practice nets $300K in annual net operating income (NOI) after salaries and supplies.
You decide to open a satellite three miles away and upgrade diagnostics.
To do that, you take on debt:
$200K five-year equipment note at 7% (fixed)
$350K ten-year build-out loan at 9% (fixed)
$75K interest-only working-capital line at 10% (variable)
Annual debt service pencils out to $108K ($47.5K equipment + $53.2K build-out + $7.5K interest on the line).
On day one, DSCR = $300K / $108K = 2.8
Loving life, everyone cheers, posts the bottle of Dom on Instagram, and gets a hot dog at Wrigley to celebrate.
But, six months later and the new office still isn’t open. Construction delays, supply delays, equipment delays. Plus two of your NPs left and your new PAs still aren’t enrolled in the bulk of plans. You hired them early thinking the clinic would be open already. NOI slumps to $150K. DSCR slides to 1.4.
You’re still above most covenants but the cushion is thinning. Another payer backlog could push NOI to $120K and DSCR to 1.1. Remember: mainstream lenders start installing trip-wires under 1.25, and SBA guidance flags anything below 1.20 as “watch-list” territory.
Allocate to cover, take debt that generates a return
Every debt dollar must earn a financial return greater than its coupon. In the case above, a 7% rate on equipment that reduces patient leakage for certain services bringing in an extra $60K a year is a good return.
The build-out, though, won’t hit full panel for 18 months, so the 9% coupon is an expensive placeholder. Plus the delays and things look a little rough. That’s fine if the practice is deliberately redirecting free cash into patient-acquisition engines, targeted digital campaigns, same-day telehealth triage, whose payback outruns the interest. But if you aren’t putting capital to work elsewhere to offset or afford the outlay you are floating for future returns, it’s easy for the debt to turn on you.
Tripartite strateegery
1/ Break out the old balance sheet and look at all your debt. List purpose, balance, rate (fixed vs variable), maturity, and monthly payment. The exercise alone exposes low return loans whose ROI fizzled years ago.
2/ Refinance what doesn’t earn its keep. If any fixed note clears 8% and funds routine overhead rather than revenue growth, run a refinance quote or fold it into an SBA 10-year at the lower end of their band. Or if you happen to have one of those swimming pool vaults, pay it off.
3/ Redeploy the savings, don’t bank them. Put every freed-up dollar into a revenue project. A new service line that doesn’t take huge investment and is complementary. Hire revenue generating staff. Invest in technology that increases yield while making everyone’s life better. Capital isn’t “saved” until it multiplies. Anything less is just deferred spending.
Wrapping up
Rates may drift a quarter point in the next Fed cycle, but the structural change already happened. Debt service now commands 7% to 15% of top-line revenue for the average owner-operated clinic. Keep the DSCR north of 1.5 and make sure every borrowed dollar chases an ROI that beats its coupon with room to spare. That’s capital allocation white coat style. It’s also how your practice stays solvent and sovereign.
Disclaimer: The content provided is intended for educational purposes only and does not constitute financial or legal advice. This content is not intended to create, and receipt of the launch guide does not constitute, an attorney-client relationship. While efforts have been made to ensure the accuracy of the information presented, it may not necessarily reflect the most current legal developments or regulations and does not provide a complete representation of all associated legal and compliance considerations for any given topic. Therefore, readers are encouraged to seek professional legal advice or consult with appropriate professionals regarding specific legal issues or concerns related to their individual circumstances.