5 Tips On Financing Your New Medical Spa Start Up
12-12-2005 Surface Medical Spas's Jeff Barson offers tips that will keep your spa in the black.
In 2004, Americans spent a whopping $44.6 billion on anti-aging products and services. This number is projected to reach $72 billion by the year 2009 (Business Communications Co., February 2005). From these numbers, it's clear the market is growing by leaps and bounds.
Plenty of opportunities exist for entrepreneurs to take advantage of this bounty. But before you jump into this market, keep in mind that sound financial planning is key to the success of any business. If you're looking to enter the medical spa field or expand your current facility, here are a few tips to consider when planning your financial future.
Success begins with a business plan. If you don't have one, get one. A good business plan helps you get a handle on all of the things that get glossed over in the excitement of starting a new business. It's also usually a requirement for getting financing.
Remember, this is a medical business and therefore has special requirements. Nonphysicians cannot legally employ physicians, manage medical oversight, comply with HIPAA requirements, or address a host of other regulatory issues. Bend these rules and you're asking for trouble. A medical spa facility not providing adequate physician oversight risks having the state confiscate all of its technology and patient records and close it down. In addition, all lenders want to know how you're going to comply with these requirements.
Financing is easy. Smart financing takes work. Speak the words "medical spa" as a physician and you're everyone's best friend. Potential investors—banks, lenders, even technology companies—will all have big smiles on their faces and papers in their hands, ready to finance everything you need. If you're not a physician, however, it's going to be harder.
If you need money or a line of credit, a bank is probably your first stop. Banks provide the best rates but are the most rigorous in investigating borrowers and have the least tolerance for risk. Banks require that you have spotless credit and that the entire loan is secured before lending. In most cases, investors who own 10 percent or more of the business are personally responsible for the loan and must provide two or more years of tax returns. Be prepared for a blizzard of paperwork; banks want to see financial statements, cash flow, and your business plan. They want to know what the funds are intended to be used for and to see tangible assets that have a market and can be sold if the business fails or you can't make the payments. They don't want to hear that you need more money for marketing, advertising, or salaries, which don't have any resale value.
The money banks lend you will take the form of either a loan or a line of credit. Loans have a set schedule of payments. A line of credit is somewhat different. The idea is that the bank extends a line of credit you may draw on. Interest is paid only on the amount of money you use. However, banks usually require that the entire balance is paid off and unused for one month every year to ensure the business is liquid. If you can't meet this requirement, the entire amount of the line of credit reverts to a loan.
Some bankers are helpful and some are not. In one instance, a branch manager told one of our accountants seeking information that the bank didn't need our business "and we could just live with that." Helpful bankers can assist you in securing loans; great bankers will be flexible if things don't go exactly as you planned. If you find a great banker, send him or her a Christmas card and some cookies once in a while.
If you are on the fringe of what a bank can tolerate in terms of risk, your banker may suggest and help you apply for a Small Business Administration (SBA) loan that's partially guaranteed by the government (www.sba.gov/financing).
Half of something is better than nothing. If you're going to need more money than you have in assets, you still have a couple of options. These involve equity, partnerships, joint ventures, or venture loans.
* Equity Most start-ups involve some form of equity trade. Partnerships are a good example. Sweat equity in the early stages provides ownership in lieu of payment or salary. It's very common for entrepreneurs to earn little or no salary, sometimes for years, until the business finds its footing. Sweat equity at this stage usually extends only to the founders but may extend to badly needed partners. When I helped start Surface, I took more than an 80 percent reduction in income. The simple rule is: The more money you need and risk you take, the more equity you're going to give up.
* Angel Investors Angel financing (also called seed money) is usually raised from friends and family or high-net-worth individuals. In some cases, you may find angel groups that actively look for investment opportunities. Angels usually participate during the early stages of a start-up and are often bought out when larger investors enter the picture.
* Venture Debt A recent surge in venture debt has made its way into the medical spa market and is worth discussing. Venture debt, also known as a venture loan, means the lender charges a higher interest rate than banks are allowed to (often around 14 percent) and accepts more risk in return. In addition, you have to give up a small percentage of your company in what are called warrants. This small percentage (usually less than 5 percent) allows the lender to share in any potential upside. Venture debt is worth considering if you're sure of success (aren't we all?), and you don't want or need to give up a large equity position in your company. But remember, you're still personally responsible for the outcomes.
* Venture Capital When most people think of raising large amounts of money, they're thinking of venture capital. For most start-ups, though, venture capital is not an option. Venture capital money is hard to get and extremely expensive, with about 80 percent compounding interest each year. Venture capital investors are looking for an investment term of three to five years and a return on investment of 700 percent or more. You may also lose complete control of your company and have someone constantly looking over your shoulder. There are cases where this actually makes sense, though; many venture capital investors are extremely well connected and bring outside resources and contacts to the table.
Getting the money for your medical spa is only half the battle. Spending it wisely takes research, planning, and weighing your goals with market realities. Part two of "Smart Financing" (coming in the September Medical Spa Report) addresses franchising, buying versus leasing equipment, and the true costs of expanding your practice.
Jeff Barson is managing partner of Surface Medical Spas, a group of cosmetic medical clinics with physicians specializing exclusively in nonsurgical cosmetic and anti-aging medicine. Offices are located in Park City, Salt Lake City, and Layton, UT, with centers opening in Charleston, WV, and Brazil. Barson can be reached at jbarson@surface-med.com
