In the aftermath of the recent Chapter 11 filing of a major player in the imaging center finance marketplace and its related subsidiaries, the market for lending to diagnostic imaging centers, particularly start-ups, has just gotten tighter. The prospects of this tighter market lasting for the near to medium term are considerable.

How will the tighter market manifest itself?

This is what we are likely to see:

  • Nonrecourse financing structures will be near impossible to find, while limited recourse structures are only hard to find.
  • Interest rates may rise to reflect the risk that lenders now believe is inherent in this market segment.
  • The lenders likely will ask for more equity.
  • Lenders will seek to finance equipment only or equipment mostly, leaving the financing (or providing) of tenant improvements and working capital to the owners of the project, their landlord, or others.

Why are lenders reacting this way?

Some would say, “Because they can.” Others would say, “Because they ought to.” And lenders would say: “Because it’s prudent lending.”

The lender that filed for Chapter 11 was a premier funding source for the outpatient diagnostic imaging center market for many years. It fostered many strong relationships during those years, with manufacturers, radiologists, radiology groups, management/development companies, and even other lenders. And when a player with such market presence turns the way it has, the market reacts or maybe even jolts. In responding, the market is very different today than what it was just a few short weeks or months ago, and it will remain very different for a while.

How Do Lenders React?

Lenders are first perceived in the person of a lending officer, a financial salesperson, or a relationship managerthe relationship-building people. However, they are not the decision-makers when it comes to final credit decisions or, sometimes, even the final structure of the transaction.

The decision-makers are the credit officersoften otherwise referred to as the underwriters. They evaluate the project structure and pricing based on the merits of the project and in the context of the lenders’ credit criteria, credit policies, and risk appetite. They use their experience, coupled with a set of parameters that have been presented, massaged, and approved by a senior-level credit committee. The parameters the underwriters follow are usually well known by the sales team (sales management generally has a great deal of input into these parameters), so surprises should be limited.

However, when something like a Chapter 11 filing of a major lender occurs, senior-level credit committees of the remaining lending sources begin a review process of their current parameters and generally issue short-term recommendations to tighten up until the reviews have been completed and the market has stabilized. Purchasers of financing services end up with a more structured transaction and may pay higher interest rates to compensate for the perceived higher market risk.

What Can You Do?

The easy answer is to find another lender who is willing to approve the transaction on terms and conditions, including interest rates, that are acceptablegood luck.

The hard answer is to figure out a way to increase your equity infusion, handle a higher interest rate, accept tougher recourse arrangements (personal and/or corporate), and seek other methods for financing the “soft costs” (defined as basically anything other than equipment).

In today’s market, there are many lenders looking to test the waters and see what the opportunities are. All of them are savvy about lending, and many of them are savvy about health care lending, but how many of them are savvy about health care project-based lending for start-ups? All of them are driven by the prospect of making money. Sometimes they are independent lenders, sometimes they are banks and bank-related lenders, and sometimes they are manufacturers and manufacturer-related lenders. They all have their pluses and their minuses (a topic for another day), but the borrower should scrutinize them very carefully to find one who has the right kind of interest in the project and will offer terms that make sense. Here are some things to think about:

  • What are your strongpoints as well as the strongpoints of your project?
  • How can you best leverage those points to get yourself the best deal you can along with a credit approval?
  • What are your weak points, as well as the weak points of your project?
  • Have you done everything you possibly can to mitigate those weak points?
  • Do you have a good understanding of the lending community as it exists at this time?
  • Can you leverage your relationship with the manufacturer of the equipment you are purchasing?
  • Should you raise more money?
  • Should you wait?
  • Should you add partners to your project?

This is a time to be prudent and thorough. If you have a project worth doing, then figure out the best way to get it done and do it.

Robert S. Goodman is managing partner, Goodman & Associates, LLC, a consulting company based in Westampton, NJ