business advisor

Surviving The Credit Crunch

How to structure your finances in these challenging economic times.

JERRY HAYES, O.D.

As we near press time, mortgage foreclosures are nearing all time highs, and the failure of the IndyMac Bank of Pasadena is the second largest in U.S. history. Such events cause local lenders to become tight-fisted, even with prosperous optometrists.

Be careful with your short-term loans

Most practice owners have two types of loans — short-term and long-term. Loans with long-term payoffs, such as three to five years for equipment and 20- to 30-year fixed-rate mortgages for real estate, are good loans to have right now, in my opinion.

On the other hand, any short-term loan, line of credit or balloon note coming due in this calendar year will face higher scrutiny than usual because of the tight credit markets. My banking sources tell me that's particularly true for home equity or other real-estate backed loans.

Review your loans now

I urge you to verify the renewal dates of all your loans and lines of credit. If you have any loans you plan to renew within the next 12 months, talk to your banker 90 to 120 days before the due date to explore your options.

It's possible that a previously generous lender will suddenly turn conservative because of the tight market and ask for payment in full on a big loan you were expecting to renew. That would force you to come up with the cash or obtain new financing on short notice.

If your credit is good and you ask well in advance, your friendly banker will likely assure you all is well. But, keep in mind that circumstances — both yours and the bank's — can change. The credit markets could be better a few months down the road. But they could be worse.

The moment your banker tells you "everything is fine," be on the safe side, and advise her you'd like to convert your loan to a long-term payout. The downside is that you'll probably incur a higher interest rate. But, rates are historically low and interest for business expenses is tax deductible. The key is to buy enough time to ride out this tight credit cycle.

Some debt is OK

Most O.D.s don't like debt. But, until you have a savings reserve of at least one year's net income, I strongly recommend you finance, or lease any equipment purchase that exceeds 1% of your practice gross. So, don't pay $25,000 cash for a new retinal camera just because your checkbook is running a big balance.

For patient-care equipment, my recommendation is that the total of your leases and loan payments should not exceed 4% of collected gross revenues. Therefore, a $600,000 practice should not spend more than $24,000 per year on equipment loans and leases.

As a guide, the total payments for all occupancy costs — that is principal, interest, taxes, insurance (PITI) and upkeep — should not exceed 8% of collected gross revenues. For example, a $600,000 practice should not spend more than $48,000 per year on PITI and upkeep. This percentage applies whether you own or rent.

Better days

The economy will get better. But now is the time to manage your fiances wisely and conserve cash to avoid getting caught in the credit crunch. OM

Disclaimer: The content of this article is for general information only and is not intended to substitute for or serve as legal, financial or management advice.