I Have Student Debt! Can I Still Borrow Money For A Practice?
Impact of a Borrower’s Student Debt on the Acquisition of a Veterinary Practice:
A Lender’s Viewpoint
Having served as Chief Credit Officer for two large regional banks, I have spent 25 years analyzing loan requests, from large complex corporate financings to auto loans. One question that frequently arises as we talk to veterinarians is “How will the $100,000 plus of student debt I have accumulated over my college years impact my ability to acquire or start my own practice?” If you are talking to a lender who specializes in your industry, the answer is very little‐ especially in a practice acquisition scenario! Our view of student debt is that these loans are an investment you have made in yourself, to put you in a position to have a very successful career.
At Live Oak Bank, our bankers have financed over 300 practice acquisitions. In almost every case, the purchasing veterinarian had significant student debt, with very little cash to put down as equity. This personal financial profile did not faze us at all. In fact, it never even comes up in the discussion as we evaluate the loan request. Why? The reason is that we focus on other factors that we feel are much more important in determining the future success of the acquiring veterinarian, and our ultimate loan repayment.
The first factor we focus on is the cash flow of the practice being acquired. The practice needs to generate enough cash to:
1) Pay the practice’s employees and suppliers (including the loan payment to the bank)
2) Pay you a salary sufficient to pay all your bills (including your student debt)
We look at the historical growth in revenues at the practice, the cash flow that has been generated and the competitors in the area to see if it can handle all payments. Because the government allows you to consolidate your student debt and pay it off over a fairly long period of time, a significant amount of student debt translates into a fairly low monthly payment. For a $100,000 student loan, the monthly payment is probably around $1,000. Although still a big payment, it typically pales in comparison to the amount of cash flow generated by a veterinary practice. We spend a great deal of our time making sure the practice you are acquiring can pay all the bills, including the student debt.
The second factor we consider in making a loan is your experience in managing a practice. Have you been managing people and dealing with the business‐side of a veterinary practice in your previous positions? We find someone usually needs three to five years experience, but every situation is unique. Do you have the skills necessary to keep your practice healthy from a financial perspective?
The third factor we look at is your credit history. Specifically, have you paid your bills on time? If you pay your bills on time, that is a huge positive. If your credit history is a little blemished, we’ll need to understand why. Next, we look at your overall level of personal debt (student loans included). We look at the monthly payments on your personal debt, and calculate how much salary you will need to take out of the practice to pay these obligations. Typically, you will need a salary where your monthly debt payments total no more than 40% of your gross salary. For example, if your student debt is $800/month, a car payment of $600/month, and a home payment of $1,100/month, your total personal debt payments are $2,500/month, $30,000/year. With this level of debt, we know that you will need a minimum salary of $75,000. The vast majority of practice acquisitions we finance can easily pay you this salary. Obviously, the higher your overall level of personal debt, the bigger the salary needed from the practice you are acquiring. This gets especially critical in a start‐up. It takes a long period of time for a new practice to generate a significant salary for you. Therefore, if you have a very high level of personal debt, it may make the bank less likely to have confidence in the loan. At Live Oak Bank, we like to see your overall level of personal debt payments to be under $3,500/month if you are starting a practice.
The veterinary industry has a great profile. Revenues for the industry have grown at twice the rate as the overall economy. Loans made to veterinarians go bad at a tiny fraction of the rate of loans in general. That is why at Live Oak Bank, we don’t view your student debt as a concern. We view it as an investment you have made in your DVM. We have successfully financed veterinarians with your level of student debt time and again. If you have additional questions, please give us a call. We look forward to hearing from you.
President, Live Oak Bank