Oftentimes when we think about pharmacies we think of massive chains like Walgreens, CVS, and Rite Aid. However, thousands of communities across the United States actually rely on independent pharmacies. These independent pharmacy businesses tend to be located in rural and inner-city areas, where the pharmacists become integral parts of their communities.
One of the unique things about independent pharmacies, especially in small towns, is that they can provide services that corporate chains cannot. These services include things like same-day delivery, medication therapy management, medicare plan guidance, asthma management, prescription management, and more. All of these allow independent pharmacies to set themselves apart.
Pharmacies can be a great option for prospective small business owners, especially if they are buying an existing pharmacy or opening a new pharmacy in areas that are either underserved or have just one pharmacy. With the proper strategy, pharmacy owners can make a good living while providing a necessary and vital community service.
Pharmacy financing is an integral part of either opening or buying a pharmacy since the upfront costs can be considerable. In this post, we’ll discuss the ins and outs of financing a start-up pharmacy or pharmacy acquisition.
There are many options for financing a pharmacy and small business owners can seek funding through multiple lender avenues depending on their credit score.
Small business loan options include the following:
- Traditional Lenders (Business Lines of Credit, Term Loans, etc.)
- The United States Small Business Administration (SBA)
- Suppliers and Wholesalers
- The Current Pharmacy Owner
Prospective owners can actually use a combination of these options to meet their funding needs.
Traditional lenders like banks can provide small business owners with a variety of loan types. Here are some examples of the funding options available to prospective business owners.
Business Line of Credit
Business lines of credit give small businesses access to funding as they need it. Business owners can borrow up to the value of the line of credit, and after repayment of this amount (with interest, of course), they can borrow the amount again.
Even if you don’t need a substantial loan to get your pharmacy up and running, having a line of credit open for your business is always a good idea. If you have a line of credit, you don’t have to use it – instead, you can keep it open just in case. This is incredibly beneficial in the event that you need quick access to capital.
A line of credit is particularly useful for managing and smoothing out your working capital and cash flow levels. Plus, depending on your credit rating, you can obtain favorable interest rates as well. Indeed, a business line of credit is an integral part of almost every small business plan.
Term loans are another resource for small business owners who need funding to either open or purchase a pharmacy.
Long-term loans are particularly useful for large purchases that will take time to repay. For example, you might want to remodel the entire pharmacy after purchasing it. If it is a large-scale and expensive remodel, a long-term loan would be the way to go. Long-term loans typically feature repayment terms of two to ten years, and you can get a really good interest rate depending on your credit score.
Short-term loans, on the other hand, are really good for covering smaller expenses that you know you will be able to pay for in the future but which you don’t have the money for now. In this sense, they can fill a role similar to that of a line of credit (though a line of credit – assuming you already have one open – is going to be much faster than going out and applying for a short-term loan). For example, you might need a short-term loan to cover the replacement of a small piece of equipment in your pharmacy or to purchase shelving or inventory. If these expenses are not too exorbitant and you think you can pay them back in 3 to 18 months, a short-term loan could be the way to go.
Inventory financing is used to refer to short-term loans and lines of credit which are taken out specifically to cover inventory expenses. Oftentimes, small businesses, especially when they are first getting started, cannot afford to purchase all of their inventory outright. This is where inventory financing comes into play.
For example, if you are opening a new pharmacy, you are going to need a lot of inventory. You will need everything from band-aids to toothbrushes to Advil. Plus, most importantly, you will need medications.
What is useful about inventory financing is that the inventory itself serves as the collateral on the loan. This makes the loan less risky for lenders since there is always something of value they can repossess in the event that you default on your payments. Since the loans are less risky, depending on your credit history, you can get better interest rates than otherwise possible.
Commercial Real Estate (CRE) Loans
If you are buying or starting a pharmacy, you will have to pay for the land it is located on and the building. This is where traditional commercial real estate loans come in. Commercial real estate loans are designed to help businesses purchase the land and commercial property they need to thrive.
Unfortunately, the barrier to entry on commercial real estate loans can be quite high. Typically, they require businesses to have been in operation for two years. That way, they can assess whether your business is viable and will be able to operate with enough profitability in the coming years to pay off the loan. They also typically require a down payment of 20% (though SBA CRE loans only require a 10% down payment). This can add up to a very large sum and take small businesses. long time to save up.
The United States Small Business Administration (SBA)
Another option for obtaining financing is through the United States Small Business Administration. SBA loans are guaranteed by the federal government, reducing the overall risk to lenders and giving Americans greater access to financing with lower interest rates.
The SBA requires borrowers to put forth an equity injection of at least 10%, so you should be prepared to utilize some of or even a large portion of your savings.
SBA loans are not actually a type of loan. Instead, it simply refers to loans that are backed by the SBA. Your business can obtain a variety of loans through the SBA, including lines of credit, term loans, commercial real estate (CRE) loans, and more. Each will have its own process and SBA requirements.
The best-known loan provided by the SBA is their small business 7(a) loan. This is a common option for small businesses that need working capital and/or equipment financing. These loans come with a maximum value of $5 million. They also have a maximum interest rate of 13.5%.
It is important to note that most SBA loans require collateral of some form.
Suppliers and Wholesalers
In order to finance your inventory, you can also work with your suppliers and wholesalers. Many suppliers and wholesalers will allow you to pay for inventory over a designated period of time. Different suppliers and wholesalers will have different financing options and opportunities, as well as different associated interest rates.
These are all things you should consider when choosing a wholesaler, as you will want to choose a company with a solid track record and good terms. Remember, you will want to build a strong relationship with your wholesaler over time (this will help lead to better terms for your business), so you want to make sure you are choosing a wholesaler you think you can form a long-term partnership with.
Banks That Work With Pharmacies
Live Oak Bank
Live Oak Bank, which is headquarters in Wilmington, North Carolina, specializes in SBA designed for specific industries. In particular, Live Oak Bank works with pharmacists across the country who are looking to acquire existing pharmacy businesses, purchase commercial real estate (CRE) for their existing pharmacy, open a new pharmacy, or refinance their existing pharmacy-related debt.
Since 2010, Live Oak Bank has lent over one billion dollars in pharmacy loans to more than 660 independent pharmacists across the United States. Along the way, they have made the success of community pharmacists their priority.
Live Oak Bank also offers long terms for their loans of up to 25 years for real estate and 10 years for refinancing.
Finally, they have a large array of resources for current and prospective pharmacy owners to read and learn from that not only focus on helping them understand how to finance their pharmacy but how to operate them effectively and profitably as well.
As an SBA preferred lender, Ameris Bank offers SBA 7(a) and 504 term loans to a series of specialized industries including pharmacy owners. These SBA-guaranteed loans can be used for commercial real estate, debt refinancing, pharmacy equipment, and working capital.
MedTrust Capital Group
MedTrust Capital Group is an online lender focusing on providing lending solutions in the healthcare industry. Currently, MedTrust offers pharmacists working capital loans, commercial real estate loans, debt consolidation and refinancing loans, and acquisition loans.
Like any lender, MedTrust considers factors like income level, credit history, financial strength, assets, and the purpose of the loan to determine interest rates and terms.
One thing that makes MedTrust particularly appealing is that they offer zero-down commercial real estate loans for pharmacists that occupy at least 51% of the building they are purchasing. These zero-money down loans can range from $5,000 to $20,000,000.
Other Alternative Lenders
Those looking to obtain financing for their pharmacy can also seek out non-bank lenders like Biz2Credit, Kabbage, and OnDeck for business loans. These loans can be approved on an accelerated basis with amounts ranging from $2,500 to $250,000, terms of 3 to 18 months, and interest rates starting at 10%.
Naturally, because non-bank lenders are taking on greater risk with their quick approval time and lower standards, interest rates are higher. But they can be a great way to access working capital and cash quickly until a more permanent solution can be found.
Where Can You Go to Meet with Lenders?
Banking and lending are all about building relationships. The better your relationship is with your lender and the longer the history you have with them, the more likely they are to approve you for a loan. In the case of pharmacy loans, there are a few methods for beginning to form relationships with lenders that operate within the pharmacy and healthcare industry.
Industry and wholesaler trade shows are a great place to meet lenders who work in the industry. It is common for prospective borrowers to frequent these shows in order to build relationships with industry players. One large event, in particular, is the National Community Pharmacists Association’s (NCPA) annual meeting. This is a great place to meet with loan officers and other lenders to learn about different options. The NCPA Digest can also provide helpful information to current and prospective pharmacy owners.
If you are looking for an SBA loan, be sure to ask lenders if they are an SBA Preferred Lending Partner (PLP). If they are, this means they are qualified to do the underwriting on SBA loans “in-house”, giving you an advantage in securing one.
What Documents Will a Lender Need to See?
When you are applying for a loan, there are a series of documents the lender will want to see.
If you are looking to purchase an existing pharmacy, the lender will want to see the business’s financial statements (balance sheet, cash flow statement, and income statement), sales performance, tax returns, and sales and cash flow forecasts, and documentation of your experience, knowledge, or training in the industry.
If you are looking to start a new pharmacy, the lender will be paying close attention not only to your qualifications to run such a business but also to your personal credit history. They’ll need to see your finances, including your savings and bank account statements, current income, and more.
At Biz2Credit, we recommend working with a qualified CPA to prepare all the necessary documentation. They will be familiar with loan application processes, so they should be able to help you prepare everything you will need for the application process. If you are buying a pharmacy, they should also be able to look at the pharmacy’s finances and determine if you are purchasing it at a fair valuation. The last thing you want to do is pay too much upfront for a business that won’t be able to generate enough cash flow to give you a return on your investment.
Do Your Due Diligence
Before taking out any loan, please be sure to read the agreement carefully and ensure you fully understand the terms. Oftentimes, small business owners can overlook important details that could result in financial ruin. For example, your loan might include a personal guarantee such that if you default your own personal finances will be at risk of being possessed. The last thing you want to do is enter an agreement that you don’t fully understand.
If anything in a loan agreement looks confusing or suspect, be sure to seek out qualified legal assistance to look over the document.
Independent pharmacies play integral and vital roles in communities across the United States. But to get off the ground and running, they almost always require financing.
While financing can often be hard to obtain for new business owners, the key is to be patient and research each and every opportunity available to you. And remember, while commercial real estate loans are often out of the reach of first-time owners, this does not mean you cannot rent a space with the option to buy a year or two down the road. In the meantime, you can finance the rest of the equipment and inventory you need. Then over, the next few years you can prove that you have what it takes to run a successful and profitable pharmacy. When the time comes, you’ll have all the proof and evidence you need that you are ready to take on a CRE loan. Indeed, with the proper long-term business plan and approach to financing, you could be well on your way to owning your own pharmacy!
Running a successful small business is no easy task, and here at Biz2Credit, we appreciate all the hard work small business owners put into building a successful company not only for themselves but their communities as well. In order to aid this effort, we work diligently to connect small businesses with financing opportunities. As part of that effort, our team is constantly posting new information about the latest trends and news surrounding small businesses in the United States. So, please be sure to keep checking back here at our Biz2Credit Blog for our latest timely content!