Robert Westergard, CFO of ASCOA, cites six ways the recession has affected lending for ASC start-ups.
1. Opportunities are still out there. ASCOA still manages to obtain financing. However, "it will likely be more difficult and time consuming to obtain financing for any project," Mr. Westergard says.
2. Banks are more cautious. "The banks' outlook has definitely changed," Mr. Westergard says. "Before they were looking for reasons to lend money. Now just about anything is a good reason not to lend money." If the bank does not feel it understands the business, it will simply decline the loan application.
3. Working with bigger banks. The banking industry is consolidating. Local and regional banks, which have often been surgery centers' best lenders, are being bought up by larger banks that are less interested in ASC deals. At the large banks, "the surgery center often is not a big enough fish to merit much attention," Mr. Westergard says. But there are some exceptions.
4. Banks require more skin in the game. Banks are not willing to lend as much as before. For example, if the ASC asks for $5 million, the bank may only agree to lend a maximum of $4 million. Banks are also requiring a higher amount of equity. Before, owners were able to get away with putting up 15 percent equity or less, but now 20 percent is the "hard floor," and sometimes even more is required.
5. Stepped-up due diligence. "The number of hoops you have to jump through has increased and the hoops are getting higher and smaller," Mr. Westergard says. For example, a bank that once required two years of tax returns might now require three years, and it is not uncommon now for an applicant to get several pages of very detailed questions from the bank.
6. Covenants have become stricter. Banks have always added extra requirements in the form of loan covenants, but now these covenants are becoming more numerous and stringent and the banks are stricter in enforcing them. For example, banks often require net worth covenants, which can be onerous because they can require an ASC to retain part of its profits rather than distributing them to investors.
In net worth covenants, banks often require the ASC to retain $500,000 to $1 million in cash, and sometimes even more. "Having so much money lying around can actually be operationally harmful to an ASC," Mr. Westergard says. "The partners may be tempted to buy unneeded equipment or the staff may be lax regarding collecting the accounts receivable or controlling costs."
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Read more insight from ASCOA leadership:
- Acquiring Struggling Surgery Centers: Q&A with Jeff Péo of ASCOA
- 3 Steps to Involve Anesthesia in ASC Cost Reduction Efforts
- 3 Mistakes ASCs Make When Purchasing Supplies