Borrowing 101: Minimize risk when taking out a loan for your practice

Several liability. An important variation of the above theme requires each partner to personally guarantee his or her percentage interest of the loan. Using the example of total debt of $1.5 million, each partner would be responsible for $300,000 and nothing more, which means the bank could collect a maximum of $300,000 from each partner. This essentially shifts the risk to the bank to collect each partner’s percentage interest in the outstanding debt. It also serves as an important hedge for the physician-partner who is wealthier than his colleagues.

Several liability with a cap. This concept incorporates the same structure as above, but with a limit on each partner’s personal exposure, which is less than the percentage interest in the outstanding debt. For example, say the outstanding debt is $1.5 million and several liability for five partners is $300,000 each. If the bank will permit a cap to be placed at $200,000 for each partner, each partner’s personal liability is effectively reduced by $100,000 in the event the practice is unable to pay off its debt.

Guaranties after you leave the practice. If you are leaving your practice, you need to be aware of any and all practice liabilities for which you may be personally responsible, like a guaranty on the practice’s debt. The fact that you and your partners may have reached agreement in connection with your departure does not mean that third parties—like a bank or landlord—are bound by that decision. Accordingly, if you leave the practice with debt outstanding, the best option is to request a release directly from the bank. If, however, the bank is unwilling to release a departing partner from the debt owed by the practice (and why should it?), you should negotiate an indemnification from your former partners as part of your exit strategy. An indemnification arrangement among the parties typically provides that the practice and the remaining partners agree to assume the departing physician’s financial responsibility. While this internal indemnification is not nearly as safe as a direct release from the bank, and, importantly, does not bind the bank to the indemnification agreement reached by the partners, it does provide the departing partner some peace of mind and the right to collect from the remaining partners if necessary.

Before you and your partners sign on the dotted line, consider (and negotiate) these banking options. The last thing you want is to be on the hook for a “what if” scenario that you thought would never arise. ENTtoday