How Much Makes Sense

There are other considerations for the amount of equity for a given project.

From a lenders perspective, the more cash equity, the easier it will be to finance. From an owners perspective, the less out-of-pocket-cash, the better. These factors have to come into balance. An owner’s experience in having developed successfully performing projects in the past, especially with the same lender, is a big factor for minimizing cash out of pocket. However, if out-of-pocket cash is minimized too much, it may result in your having to personally guarantee an inordinate amount of the debt. Some amount of personal or corporate guaranty ought to be expected, but it can be minimized or even eliminated under the right circumstances with the right lender.

From an owner’s perspective, especially if you have partners (other radiologists, the local hospital, a corporation and/or other business people), how much equity each partner is putting into the project can be considered a barometer for the type of support that you can expect from those partners. In some instances, you may want the lender to insist on personal or corporate guaranties as a way of adding to the seriousness of each investor’s interest.

By way of example, let’s say that you are starting a new MRI only center. Your capital costs are going to look something like this:

  • MRI unit - $1.2 million to $1.4 million
  • Furniture, Fixtures and Non-Medical Equipment - $100,000
  • Leasehold Improvements (assumes you are leasing space) - $200,000 to $300,000

The range of cost in this example is $1.5 million on the low end and $1.8 million on the high end. Let’s also say that you have never done this before on your own and you want non-recourse financing (no personal guaranties). If a lender is willing to consider non-recourse financing (most do not), that will require at least about 30% equity ($500,000 to $600,000). A “rule of thumb” that is often used by some lenders is that they will lend only for equipment and leasehold improvements, leaving the owner responsible for the working capital – considered to be at least 3 months of operating expense – as their equity contribution to the project. Check your financial forecast and you will see if the $500,000 to $600,000 (30%) provides enough money for covering that period of time, then your probably going to get what you want. Consider, too, that your upfront costs for feasibility and other business planning services (including costs for consultants, lawyers and accountants) will be borne by you as well. Again, assess whether or not the $500,000 to $600,000 will be enough to cover your costs and whether or not it’s enough to keep your partners interested in what you are all doing.

Note that if you are accepting of personal guaranties, the amount of equity required can readily drop to between 15% and 20% (you still want 3 months of operating expense in the bank as working capital when the doors open). If you invest more than 30% as equity, you are likely to gain a mush easier time of obtaining financing without being required to provide personal guaranties.

So, the answer to “how much makes sense?” depends upon a variety of factors, but if you go with what you think makes sense and will not keep you up at night, you are probably making the right decision.

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