We hear a great deal about healthcare consolidation today. The truth is, it has been happening in earnest for two to three years already, and it isn’t showing any signs of slowing down. Indeed, as uncertainty over the future of healthcare continues to build, as bundled payments continue to strain profits and overhead continues to climb, more and more healthcare providers may consolidate, and, in the case of hospitals, absorb physician practices to feed patient volume and capture economies of scale.
Patient demands are also fueling the consolidation trend. Thanks to the Internet, consumers are well informed about the latest diagnostic tools and high-tech treatment options, and actively seek out providers that offer them. They also research physicians, opting for those who have the most experience and best credentials. And as a growing number of patients, particularly baby boomers, are seeking treatment, they are also demanding private rooms. When regional or community hospitals don’t offer these benefits, patients go elsewhere.
Of course, all of the expenditures that are necessary to stay competitive require capital – and lots of it. So how do you secure financing in today’s credit environment? If you understand what makes a deal attractive to lenders, you’re a step ahead of many. Here’s what we’d tell prospective borrowers if they asked.
Know what leaders need
When lenders evaluate a potential deal, we’re looking primarily at three things: your financials, your expertise and the quality of care you provide your patients. We conduct extensive due diligence, and these three things tell us who’s seasoned, which comes out in the survey reports, and who’s a good healthcare provider (and consequently a good credit risk) because we can intuit that friends don’t go where others have had bad experiences.
For existing refinancings, among other things, we look for strong market share, strong market demand and a good strategic plan. By ‘good,’ I mean that you understand your market and your entity’s strengths and weaknesses, you’ve given me realistic financial projections and you have sufficient research to substantiate the claims you’re making. Don’t sell me. Show me. Because if the plan doesn’t paint a realistic picture consistent with growth in the industry, I’m not buying it. It bears repeating: Be sure you can back up your claims.
If you’re seeking financing for new construction, in addition to the foregoing, we look for strong demographics, a detailed, well-written market study to support need, and a good capital structure. We want you to put a sufficient amount of equity into the deal. Don’t sell me on something you wouldn’t personally support.
Your best investment? Look to the future
As far as where to invest, the best advice I can give is to look at your core operations. How are you making money today? Can you sustain it? Home care used to be paid by the visit, but thanks to bundled care, payments are now episodic. So if you provide home care, for example, does your current business model make sense? If not, you need to shift it to keep up with the changing environment.
Why we turn you down
One of the biggest mistakes that borrowers make is overpromising what they can deliver; over-hyping is a serious red flag. It also concerns me when people want financing for new construction that they insist is a no-brainer yet they want to borrow 85 percent of the deal. They’re just not being cautious enough. I’m thinking: Why are they unwilling to put much into the deal? And what’s the minimum amount of money they need to make each month to pay me back? If they default, what do I get in return? Do I really want the collateral? Those are all things that affect our decision, and you have a better chance of a loan if you can anticipate and address them.
While some of these points may seem obvious, you’d be surprised how often borrowers come to us unprepared. If you want financing, understand that we can be reviewing 100 loans at any given time. If your application is incomplete, we’ll move on and work on the package that’s got all the information we need while waiting for your additional information. Be as buttoned up as possible, and convince us you’re a good risk.
Matthew Huber is a senior vice president at First Niagara Bank, N.A.