business plan: Your key to successful startup funding, The

Journal of the American Chiropractic Association, Sep 2000 by Li, Minghe

After much sacrifice and burning of midnight oil, you are finally in your last trimester. Or perhaps you have already graduated. Perhaps you are working as an associate with an established chiropractor. How are you going to get financing to start your new practice? Professionally, this can be a life-anddeath question. To understand how this process works, here is a banker's perspective.

Why Are Bankers Conservative?

Banks don't automatically have money on hand for loans. Instead, they use customer deposits (on which they pay interest) or borrow from other institutions. For example, one bank may borrow at 6 percent and lend to you at 10 percent. For a $60,000 loan, the bank makes only $2,400 ($60,000 times 4%). If the loan is for 5 years, the bank makes only $480 a year ($2,400/5). The annual return on investment ($480/$60,000) is only 0.8 percent, not a great deal for people who are used to double-digit returns. Above all, the bank risks losing $60,000 if you don't make your loan payment. That's why lenders are generally so conservative: They are risking a lot to get a little.

Imagine yourself in a perfect situation: You have a well-established practice with strong cash flows, tons of cash and equity, little or no debt, impeccable credit, and no problem making a hefty down payment. As a matter of fact, you already have enough cash to cover the entire loan! Guess what?

Bankers will make you an immediate offer without down payment or collateral! They will even match their competitor's interest rate. Why? Bankers do actively give loans because loans are an important source of income. If you are a riskless client, they know they will make money.

Most applicants (especially new doctors), however, are not so fortunate. They may have some credit report blemishes, little cash on hand (let alone a down payment), no home equity or stocks/bonds for collateral, six-digit student loans, all credit cards maxed out, and no rich family members to co-sign. Does that mean it's hopeless? No. Most new doctors fit in this category.

How Do You Make Your Case ff You Are Imperfect?

Each new doctor who gets a loan has managed to convince bankers that they will get their money back. The important thing is to create a strong business plan and focus on your strengths.

Business Plan

A good business plan includes three year financial projecdons, a marketing plan, and a management plan. The financial projections are the most important part, since nothing speaks louder to bankers than numbers. The marketing plan includes brief background information about chiropractic, your location (why it's favorable to your growth), and marketing strategies (how you can get new patients). The management plan basically includes your credentials and experience, which demonstrate your ability as a good doctor and manager. Do not use currently available "cookie-cutter" software plans. They generally have scant financial projections and too much unnecessary information (overemphasizing student loans, body height and weight, and indepth descriptions of chiropractic and the doctor's techniques). These are of no interest to bankers.

Financial projections give bankers a sense of your profit and cash Flow if you get the loan. You need to prove to bankers that you will have more than enough cash flow to meet the monthly loan payment, your overhead, and a reasonable owner's salary. The financial projections should be as close to reality as possible. That shows bankers you have done your homework, and it helps you determine how much you need to borrow. Therefore, if you can get the actual numbers (equipment quotes, furniture prices, rent, deposits, malpractice insurance, liability insurance, newspaper/Yellow Pages ad, etc.), use the actual numbers. Some bankers say if they see too many zeros, they know the numbers aren't reliablethey like everything down to the penny. Remember that if you underestimate equipment and furniture or monthly expenses, you may end up overspending later-and eating into your limited working capital.

On the other hand, since you are not in practice, you can't really forecast your income or many expenses. The temptation is to use over-optimistic assumptions to show strong projections. That actually works against you. The more optimistic you become, the more doubtful bankers get. The trick is to use conservative assumptions and still show strong projections. It's good to be on the conservative side and be happily surprised later. Some new grads estimate over 30 new patients a month. You may very well produce that result, but the chances that you can outperform the industry average in your first month are not high.

To avoid undercapitalization (one of the main reasons for new-business failures), try to borrow enough to pay for all equipment and furniture, startup expenditures, and at least four months of working capital. Although this amounts to a large sum (at least $60,000), you can justify the use of capital to bankers. However, it is very important to be frugal in your planning, since there's a limit to the loan for which you can qualify. Plan to buy allyou need-but only what you absolutely need. Buy fancy and expensive equipment later. If you can get reliable used equipment, go for it. You should also be careful not to "pad" the numbers for equipment and expenses, hoping to get more money. If you request $100,000 for a startup loan, you could jeopardize the entire loan-without strong personal finances. There is a fine line between borrowing just enough and asking for too much.