Some practices may also have long-standing loans from a major provider which are about to mature and cannot be ‘rolled-over' so need to be refinanced.
All too often however, finance is an issue that is left until the last minute and results in a ‘quick-fix’ rather than a well thought through decision. Taking the time to consider what is best for the practice and partners longer-term, should result in a better finance package making future succession easier and saving costs.
Here are ten things to think about:
Should the borrowing be in the name of individual partners, the partnership or even a limited company? How the loan is set up will affect the cost but may also impact the ease of borrowing in the future if partners change etc. Also consider any connected issues, eg partner changes will mean you need to update your partnership agreement or there may be the need for a lease; are there any tax implications?
Some GPs want to pay the minimum they can each month so they can take any ongoing ‘profit’ along the way, with less equity when they leave. Others may want to pay off their loan as soon as possible and take any benefit at the end as a lump sum. The right loan may allow some partners to do it one way and some the other.
A common assumption is that your current bank will provide the best deal. They might; but often the best rates are used to attract new custom or ’switchers’. As with some insurance and utility contracts, banks can take advantage of your loyalty. Also make sure the person you talk to at the bank understands GP premises finance and that the bank has specific credit and pricing policies which reflect the sector's ‘low risk’.
Most people look at the proposed interest rate as the main comparison between providers. You should question whether the rate covers the entire loan or just any ’secured' element; can it change for any reason after, say, three years; is it fixed or variable? As with many things, what appears to be the cheapest may not be the best value or the best deal for you.
There are different ways banks ‘commit’ funds, and this will impact the rate offered. Some will commit for the full term of, say, 25 years; others want to review every five years. In general, the shorter the commitment, the lower the interest rate, but subsequent renewals may see the rate rise and additional fees incurred. When comparing rates make sure you compare offers with the same terms and commitment.
A major consideration should be the monthly loan repayment commitment. What may be comfortable now may not be in a couple of years and remember if interest rates rise your repayments will increase. For this reason, do not over-commit and if appropriate go for a slightly longer loan term, eg 25 years instead of 20, with the option to repay early without penalty.
You will probably be asked to decide between fixed rates or base rate linked; 20 or 25-years term, full repayment or interest only (if available). With the right provider however, it need not be ‘all or nothing’. As an example, you may be able to have part fixed, part variable and possibly some interest only. Decide what is best for you and get it built into your loan.
Try and make sure the loan has sufficient flexibility to allow for future partner changes, retirements etc. Consider what might happen; is there the possibility of a merger or surgery development? Do not commit to fixed rates if the contract may have to be ‘broken’, incurring large penalties. Also build in some flexibility to enable lump sum capital reductions or potentially increase the borrowing if circumstances change.
All contracts and agreements tend to have more 'terms and conditions’ than the headline features. Make sure you understand anything which may impact your plans or mean additional fees. As examples, are personal guarantees required, are there restrictions on early repayments or the need for regular re-valuations at your expense?
Existing arrangements can be complicated with historic partner loans, some with fixed rates and penalties, others at very cheap rates, and all with different maturity dates. Refinancing every loan and every partner at the same time may not be possible. Decide how the ideal structure would look and then work towards it in stages if necessary. Make sure the bank works with you to provide what is best for the practice.
The points outlined here may reinforce the view that the issue should be left for another day! This leads to the final suggestion: use an experienced, independent specialist broker who knows all the banks' healthcare teams and will help build the best loan package for you. They should work for you on a ‘no fee’ basis because if they arrange new finance, they will be paid an ‘Introducer Fee’ by the bank concerned.
Last but not least, always sense-check the loan offer with your accountant to ensure there are no hidden tax issues and ensure your partnership agreement is updated as necessary.