Q&A on Finance Leasing

On Friday, 22 May 2020, ASAPS held a webinar for ASAPS Members to put forward their questions to industry experts about Finance Leasing pertaining to them as business owners in relation to COVID-19. It is important that you get specific professional advice in relation to your circumstances since the situation is fluid and subject to legislative changes.

Can you provide a quick snapshot of the financial lending landscape – how this pandemic has affected the medical industry broadly and how you have been able to help?

When the lockdown was put in place the first modality that was on the phone were dentists. Then followed was ophthalmologists, ENTs and plastic surgeons after that. 

We moved very quickly and provided the assistance packages that we had. Four to six weeks down the track, a number of our clients have phoned us back and said they had jumped early because they were very concerned. However their situation wasn’t as bad as they had predicted. A number of them are actually unwinding the deferments that we had put in place for them. There’s no additional cost to doing this, yet we capitalise the interest but they didn’t want to have to be hit hard when the deferment periods matured.They wanted to make sure they were on top of their financials all the time and make sure they had the cash.

Many practitioners that we look after always had a Plan B in place. They moved quickly, but they had a Plan B. This meant they had some cash reserves or they were taking measures to keep cash flowing in their practises with social distancing, pushing out appointments and  spreading them out.

What has been the impact on the landscape from a BOQ perspective? 

Approximately one in five people who applied for hardship are unwinding them rather than going through with it. 

We definitely went to market with the view to help people – allowing them to stop payments straight away. So we were stopping payments well before these applications were processed, because paying staff is the most important thing. The people who were asking to unwind were literally in a position where they could make up the payments that were just stopped.

A lot of customers are really interested as to how they can reduce their tax liabilities at the moment. The government has pumped a lot of stimulus in via JobKeeper and other subsidies. I think a lot of customers feel like with that stimulus that FY ’20 profit will be there or thereabouts with their FY ’19. They might have used some money set aside to pay tax for working capital to help get through this period and there is a tax issue on the horizon. They’re now starting to look at what they can do about that.

Are people defaulting on loans and what do you advise people do if they are close to or working towards having to default?

No, not as yet from COVID. There may be some in particular modalities and that would be where they were probably not performing at optimum, going into COVID-19 – they’re highly leveraged and then slow to trade out. In terms of the general market, there’s going to be a big shock. In terms of healthcare, there will be some businesses that don’t pull through but it will be nowhere near what it will be in the general market.

The overriding theme is we don’t want anyone to fall over. If you’re thinking about defaulting – don’t leave it to the last minute. Think about the professionals you need to be discussing this with earlier in the piece rather than leaving it. You need to pick up the phone to your broker, your accountant and maybe your lawyer for some advice. The earlier we know, the better we can deal with it. 

The accountant is an integral person in the healthcare practitioners world, because practitioners are time poor. If their accountant is not their best friend or a close personal friend, they need to wine and dine them until they are – or change. A lot of doctors don’t want to pick up the phone and speak to their accountant to get advice because of the charges. If you’re worried about what your accountant charges, they’re not a good accountant. You need to have a good accountant.    

Can you still borrow during this phase of the pandemic and the phase that we’re heading into and what do people need to provide to you to apply to get that application across the line? 

Yes, people are borrowing and you can borrow. 

What is very interesting is that a lot of people quickly deferred their payments. In many cases there was nothing wrong with their business. As a result they wanted a piece of equipment or they wanted to buy another business or invest somewhere else. However because they had deferred a loan repayment the banks were not going to lend to them.  This was because on the one hand they were saying they were distressed and needed a deferment of payment and on the other hand, they were saying it’s business as usual and they still wanted to borrow.

A critical point to make is – don’t get bad advice. A lot of surgeons are too proud to say that they don’t know what to do and they don’t want to let people know that they don’t know. They should have a good relationship with their accountant and their accountant should be advising them on what to do, who to talk to and how to address it.

There are some specialist healthcare lenders, including BOQ Specialist and Medfin and Medpro, that will still lend to doctors even if they’ve taken advantage of the hardship relief. They will continue to support the industry during hard times, when some of the major banks have gone a bit gun shy.

It’s extremely important that you communicate. If you’re in trouble, you need to pick up the phone. It’d be a very brave lender in this day and age, at this time in history, to treat people poorly or without respect or without compassion for the situation that they may find themselves in. 

Is there an optimal level of leverage particularly when buying very high-tech equipment? How do you then mitigate that risk? 

Pre-COVID, you would find most lenders would effectively debt fund 100% of that equipment and the fit out of plastic and cosmetic clinics as well. People who have financed practice startups are potentially quite highly leveraged in terms of their asset finance. 

COVID-19 is completely unforeseen and so unique in what we’re experiencing. If you are highly leveraged, you’re probably going to feel that pain when cash flow is tight. At the moment the government stimulus packages and loan deferrals are making it manageable to manage cash flow.

Medium to long term coming out of this, the plastic surgeons and cosmetic surgeons who we’ve funded 100% into their practices previously should go back to making the similar levels of income and be able to repay the debt. 

It is highly leveraged across the industry. What’s important when it comes to mitigating risk is that the practitioner can sleep at night with whatever debt level they have. They also need to have a Plan B should something happen. 

Are you seeing some confidence coming back into the market in the next six to nine months?

Yes. There are people that cannot afford not to be talking to their practitioner in all the modalities – especially in the ophthalmology. 

Initially dentists had deferred a lot of their patient appointments out through to July. However July is now fully booked and they are bringing those appointments forward to May and June.

Q: Have plastic surgeons been impacted more than other specialties?

Yes, initially but hopefully there’ll be a backlog of appointments with people who need fillers and all sorts of things after two to three months in lockdown. 

Q: If you’re leveraged and you want to consider taking the $150,000 immediate depreciation, what’s the best way to structure that? 

Up to $150,000, you can effectively write off this financial year. Ideally your accountant would advise you whether a lease or a business loan or a higher purchase is better. Normally a lease would be the most tax effective but it depends on how you’re structured. So again, you’d get advice from your accountant but you’d probably take a business loan and write the machine off immediately if it was $150,000 or less. The other reason why it’s also good to gear up is that interest rates are the lowest they have ever been and they’re fixed for the term, so it’s a good time to borrow from that point of view.

If you do want the instant asset write-off, the max on that is $150,000, though, so if you bought the $300,000 piece of equipment, you’re into the business incentive scheme. This means you can basically write off half of the value of it this year and then one year’s worth of depreciation at the same time. That’s a question for your accountant but just something to keep in mind.

You can also pool your resources. A group of dermatologists for example, wanted a laser and it was about $300,000. They all wanted to use it, all had demand for it but they didn’t want to use it all the time. A deal was made where one dermatologist kept it in their practice – one paid two-fifths, one paid two-fifths, one paid one-fifth. The person who stored it, insured it and then they just booked it between themselves and that worked really well.

There are also lots of promotional offers in the market at the moment with different medical equipment suppliers, which offer a deferred payment arrangement. So six or 12 months with no interest and no repayments. That allows you to get the equipment in now, while cash flow is a little bit tight, get it generating income and then you don’t actually start paying for it until the middle of next year or the end of next year.

Q: What do you see that needs to shift at the macro level before there’ll be a return to stronger borrowing and investing?

It’s generally confidence in the patients feeling comfortable enough to return. 

Q:  Do you see the criteria by which an application will be approved or reviewed changing? 

The core criteria doesn’t change. You’ve got to demonstrate that you can service the loan. Provide the hard facts of how COVID has affected your own practice and you talk to your lender.

Q:  Do plastic surgeons have a documented business plan and strategy that is viable post-COVID?

There are some people that do – most don’t and that’s a mistake. 

Doctors might agree that they would prefer in future to be in a better position than they were at the beginning of March. That means having things prepaid, having money in an offset account etc… Going forward, the smarter people will actually start considering a Plan B for something like this that they may never have foreseen.

Can a fit out be written off with $150,000 depreciation?

Yes. What we’re seeing is that there may be three or four invoices that describe the asset and they all add up to the $150,000. So they can get that immediate asset write-off, and if they finance it, obviously they can then claim the interest over the term of the loan. They can’t claim any more depreciation but they can claim the financing costs.

Q: Do you see that there’ll be a shift towards lower-end cosmetic treatments, non-surgical injectables, etc.? 

It all comes down to how we react as a general population with social distancing. Is this going to become a bit more of a way of life? 

Are we going to become a bit more cautious in how we interact with people and with what procedures we have done? 

This could go on for a period of time but cosmetic surgery in Australia is quite popular and that trend should eventually get back to some kind or normality.

Plastic surgeons and the cosmetic industry is a discretionary spend, one which would probably drop off in a crisis like we’re experiencing now. However, it’s a matter of what people want and what they’re prepared to spend their money on. One would suspect that a fair amount of people’s JobSeeker and JobKeeper will be going towards feeling good about themselves and making themselves look better, of which cosmetic physicians and plastic surgeons will be the beneficiaries.

Q: What are the other activities that business owners can start to think about now in the plan for the future in terms of managing cash flow and looking for that potential investment in the future?

This is a good opportunity for people to step back and work on their business. Do this in conjunction with your accountant.

The most common mistake is that people don’t have a business plan. Whether that is just a one pager with the idea in your head, or a glossy document of many. It’s also great for any lender to have in front of them. 

In the finance industry, you usually go away once a year as a group and you would have meetings to reflect on the business. It’s like a revision of your business plan. Most doctors don’t have the time, they’re fully booked and in their spare time they want to play golf or just see their family. However, they really need to set time aside to do this and get their accountant involved. It’s also good to hear what staff think, because staff often have very good ideas but it’s also a chance for the doctor to let them know about patient numbers and how things are going in general.

Q: Is there anything in the gap that you saw pre-COVID that was run of the mill that you would like to see either more of, or have more definition around from either the business plan or a visibility to support an application going forward? What does that look like?

Cash flow planning is key. It’s generally not required from our customers unless they’re starting a new practice and they’re showing things ramp up over time. However, it’s critical for any practice to put that planning into cash flow. The great thing is once you’ve done it once with your accountant – you’ve got the template, you can just update it. You can probably even just pull the numbers straight out of Xero and it’ll compile itself. It’s just doing that initial little bit of homework to get it going.

Q: And what sort of a confidence factor do you apply to that, given the current climate that we’re in?

If a practitioner has put the work in to pull it together it provides a lot of confidence to the lender. 

There’s a template running around at the moment where you would literally plug in your FY ’19 numbers month by month and then apply in the field below a percentage of revenue drop as per COVID-19 – it will then map out a run rate over the next six to 12 months.       

It’s also important that tax returns are all up-to-date, because when you want to borrow money, you have to have a good clean starting point. 

Q: In summary, what are the top three pieces of advice be to business owners right now preparing for the next six to 12 months? 

1. Talk to your accountant. Talk to them about government stimulus measures, talk to them about the instant asset write-off coming up because we’ve only got five weeks left of that and talk to them about that cash flow planning for the next year. 
2. Have a Plan B and put some money aside. 
3. Be positive. The health industry does not fail. The health industry is recession proof. If doctors, dentists, vets and pharmacists start going broke en masse, we’re all in trouble. It won’t happen. 

Convenors: 

Dr Naveen Somia, President, ASAPS

Suzane Ali, ASAPS

Sean Collins, Encite Partners

Rodney Jago, Medfin

Ross Andrews,  Med Pro Finance

Tim Browning, BOQ Specialist