It’s no secret that independent community pharmacies are facing a tough market today.
“Community pharmacies aren’t getting notices in the mail that third parties are going to increase their reimbursements,” said Jimmy Neil, general manager at Live Oak Bank in Wilmington, N.C., a bank specializing in small business loans, including independent community pharmacy lending. “They’re not getting notifications that more drugs are covered under formularies than aren’t covered. Preferred networks and select networks aren’t going away. It’s more difficult.”
As pharmacies strive to make innovative changes to stay competitive, they’re going to need funding. But where does the money come from?
Neil said pharmacies need a lending partner that understands how growth can positively influence their business.
It pays to diversify
Diversifying your business is necessary today because of increasing competition. “The chains continue to build more and more pharmacies, they continue to consolidate and they have advantages as such in the marketplace,” Neil said.
Successful pharmacies need to try new things. And, trying new things requires money and working capital. “It takes money to make money, so you need to invest,” Neil said.
Whether you’re investing in compounding, pharmacy management software updates, robotics, packaging automation or other innovative services, it all takes extra funding.
“If your margins are continually challenged, you may not have the excess cash to invest, so you may need to borrow $100,000 to $5 million to invest in your business,” Neil said.
Financing options
There are a lot of ways pharmacies are looking to grow today—and a lending partner can help.
“Recently, we’ve been loaning money to pharmacies in the area of working capital for specialty pharmacy,” Neil said. For example, “A pharmacy owner has secured a relationship with a referral channel, a physician or network to get some specialty scripts, and realized they need several hundred thousand dollars in order to buy inventory and pay for operations until those dollars come in.”
Another way Live Oak Bank has helped pharmacies diversify is through file acquisition, which Neil referred to as taking a play out of the chains’ playbook. “When a pharmacy is looking to sell, instead of selling prescription files to the chains, the pharmacy sells to another independent, and we finance that,” Neil said. “Almost all of the customers transition their business to the other independent.”
Neil also said a lot of pharmacy owners would like to own the real estate their pharmacy resides on, so they’re looking for a lending partner to help. “They’ve approached the landlords, who in most cases used to own the pharmacy, and they’re buying the real estate from them,” he said.
Additionally, pharmacies are looking to refinance. “Interest rates are still relatively low, so we’re able to refinance some lines of credit and unfavorable term debt,” Neil said.
Types of loans
Live Oak Bank offers U.S. Small Business Administration (SBA)-guaranteed loans for pharmacies. Neil said that these loans allow the bank to finance small businesses that otherwise wouldn’t be able to obtain a conventional loan.
According to Neil, conventional banks typically want collateral in the form of real estate or a liquid asset. But, for independent pharmacies, the majority of the acquisition loan is allocated to purchase script files or the “goodwill”.
“Most conventional banks don’t give any collateral valuation to the script files,” Neil said. “As an SBA- guaranteed lender, we’re able to give the script files or the ‘goodwill’ collateral value.”
Getting started
Neil’s advice to independent pharmacies that want to expand and diversify their business is to do their homework.
He stressed the importance of deciding what type of diversification you want to do, finding out what your competitive advantage is and understanding the risks associated with expanding your business.
“I would make sure you truly believe in a strategy that you want to take,” he said. “Find something that’s unique and make sure you can execute on it.”
5 Criteria to Qualify for a Loan
As a U.S. Small Business Administration (SBA)-guaranteed lender, Live Oak Bank in Wilmington, N.C., primarily looks at five criteria when evaluating whether or not an independent community pharmacy will qualify for a loan.
1. Credit score
A pharmacy’s FICO score must be in the low 600s to 820.
2. Cash
If there’s an acquisition, a pharmacy must be able to invest some cash into the business.
3. Collateral
If it’s a marginal deal, it helps if a pharmacy has some equity in real estate collateral.
4. Cash flow
A pharmacy must generate at least 25 percent more cash than is required to pay the bank debt each month or year.
5. Competency
A pharmacy owner needs to be able to demonstrate the competencies that are required to run a successful business.
