Financing to Purchasing a Senior Care Operation

Most of the clients I assist operate small assisted living facilities or small agencies. They usually are not part of a franchise network. When it comes to assisting their buyers with financing, buyers options are limited. Traditional commercial banks tend to shy away from lending to small businesses. They deem then too risky. For purchases above $200,000, buyers usually need a secondary source of financing to get their deal done.

Listed below are some options available for senior care buyers.

Personal Savings

Personal savings are the cash reserves you have access to for investment or emergency purposes. They are unencumbered funds. They are usually in the form of a savings account, investment account, or marketable securities account. It is the securest method of financing your transaction. The advantages are (a) no monthly repayment requirement, (b) quick access to funds, and (c) provides an equity cushion for your operation. The disadvantages are (a) reduces your cash reserve for working capital needs or emergencies, (b) risks losing your cushion and depleting your back-up reserve, and (c) it is a limited resource.

Seller Financing.

Seller financing occurs when the seller allows the buyer to pay a portion of the purchase price over time. It is usually evinced by a secured note. During the days of high interest rates, seller financing became popular as a financing mechanism for smaller transactions. The advantages of seller financing are (a) simpler credit review by seller, (b) loan usually processed at closing, and (c) funds readily available. The disadvantages of seller financing are (a) interest rate may be higher than other funding sources, and (b) seller remains tied to the operation.

SBA-Guarantee Loans.

An SBA-guarantee loan is a loan made by a commercial lender that the US Small Business Administration guarantees will be paid back. The buyer applies for the loan guarantee with a bank (usually with an SBA Preferred Lender). Once the bank gets an SBA loan authorization, the bank funds a portion of the purchase price. The advantages of an SBA-guarantee loan are (a) readily available for qualified buyers, and (b) no collateral requirement in a many cases. The disadvantages of an SBA-guarantee loan are (a) buyer must pay a one-time SBA guarantee fee, (b) interest rate are higher than conventional bank loans, (c) loan underwriting and processing may delay the purchase process, and (d) continual reporting requirements are required to assure loan covenants are being met.

HELOC.

Home equity lines of credit (HELOC) are secondary loans buyer take out on existing leveraged real estate. They are usually secured by a lien on real estate. The advantages of a HELOC are (a) the interest rate may be lower than other consumer loans, (b) they are readily available and simple to process, (c) funds can be withdraw as needed, and (d) repayment periods may be longer than other consumer loans. The disadvantages of a HELOC are (a) loan availability may get reduced by the bank due to real estate value decline, and (b) the interest rate varies.

401K Loan.

Using retirement funds from your 401K plan for a business venture is often referred to as "Rollover for Business Startup (ROBS)." Participants can use these retirement funds to purchase their operation. The advantage is participants can usually borrow up to 50% of their vested balance, with a maximum amount. The disadvantages are (a) failure to strictly comply with the rules could result in the IRS deeming the transaction as a taxable early withdrawn from the 401K plan, (b) repayment is required within a few years, and (c) less money is available for your retirement.

Friends, Family, and Fools.

Friends, family, and fools (i.e., other people looking to invest in your project) is a traditional source of financing. People funds partnerships for business ventures all the time. Parents routinely sponsor their children in such ventures. Investors are alway looking for the next great opportunity. The advantages of this form of financing are (a) the amount you can raise is only limited to your ability to attract interested persons, and (b) what, if, and when you repay investors is negotiable. The disadvantages are (a) you may not want your investors involved in the details of your operation, (b) investors' risk profiles vary and can cause undue stress to you and other investors, and (c) it may destroy existing personal relationships.