Money doesn’t grow on trees – an old sentiment that, especially when opening a business, rings loud and clear. Unless you are one of the lucky few with enough money to start up without help from lenders or family, you will be looking for some help. The options are few and the risks are varied but with a little guidance and know how, you can find the right opportunity for you.
Coupled with financing in this issue is insuring your business. Protecting yourself and your employees is paramount when opening a new business, but knowing what coverages are essential in O&P can be confusing given the nature of the industry. We spoke to an expert in one of the leading O&P insurance firms to find out what you need to open your doors and protect your growing company.
“For small mom and pop operations, the “big world of business”…may be beyond the pale…so we have to worry about other avenues,” Bob Shephard, director of SCORE Central and North Florida District, told O&P Business News. “If you are going to start up a business, regardless of size, it is critical to build a business plan first. That is not only for money loan purposes, but for you. If you do it properly, you are going to end up ahead of the game because you can use it as a guide to look back and say, ‘what was I going to do, and have I done it?’”
The means by which you plan to fund your business should be clearly defined in your business plan, as well as the time frame for paying back family members, creditors or lenders. The Small Business Administration (SBA) cited “inadequate or ill-timed financing” as the second most common reason businesses fail.
O&P Business News spoke to Shephard and some successful O&P business owners who shared their ideas about financing options for others considering starting their own business. Potential small business owners can visit SBA’s Web site for more information.
Shephard defines love money as the money borrowed from close friends and relatives for startup financing, and further suggests this avenue for small business owners.
“The love money process is probably an avenue to explore in some detail… depending on what amount you are looking for,” Shephard told O&P Business News. “By that I am saying, [if you are looking to borrow] under $100,000 it is probably wise to look [to them] first, and [if you] have that business plan, it is much more receptive to friends and relatives because they know that you are dealing with this process professionally.”
Jeff Quelet, CPO, owner of vice president of Ability Prosthetics & Orthotics and Lou Perrotta, CPO, owner of Perrotta Prosthetics and Orthotics, both considered this a viable option for at least part of their funding.
If you own your own home, a home equity loan might be another option to explore.
“The advantage of that is you probably have a low interest rate, it is easier to pay back and there is much less pressure on it,” Shepard said. “The disadvantage is that it hits a mortgage on your home.”
If you evade your loan, you run the risk of losing not only your business but your home as well.
Credit cards are an option that is met with mixed feelings, but with proper planning, can be used to your benefit.
“When [business owners] build their business plan, they [need to develop] a financial plan that stipulates that they have to pay it back quickly because otherwise interest rates get beyond control,” Shephard said. “However, it is an immediate source of money. The key is to recognize that 12%, 15%, 20% can come up on you rather quickly, so you build your plan around the repayment.”
In O&P, it is unlikely that you will receive payment the same day that services are rendered. Some owners we spoke with suggested a credit line to get through those periods when you are awaiting payment.
“You want to have contingencies especially when first opening,” Quelet said. “I recommend that you definitely take out a line of credit to go through those ebbs and flows, especially in those first 6 to 9 months.”
Dennis Clark, CPO, president of Point Health Centers of America Inc. and Clark & Associates, expressed a similar outlook, stressing that seeking a line of credit is not an indicator that things are not going well, as the stigma suggests, but an additional cushion for handling cash flow issues.
Also, the state of the economy and your business history can play a large role in the ability to gain a loan elsewhere. A credit line might be just enough to get the business rolling, Brian Monroe, CPO, owner/president of District Amputee Care Center in Washington, D.C., explained.
The SBA lists a number of banks and smaller lending institutions that are SBA approved and offer a community express loan that allows an entrepreneur to borrow up to $50,000.
“If they have an approved business plan by a reliable source such as SCORE, their chances of going after that money and getting it are high because their technical end of the business has been approved by a reliable source,” Shephard said. “In some cases if…there is a risk factor, then they will suggest that you enter into a contract with the SBA for a guarantee of 80% of your loan.”
However, if you choose this option, make sure you verify the loan repayment amount, as there will be additional percentage added for going through SBA.
Quelet recommends looking into SBA loans if you plan on growing your business.
“The SBA is government-backed and has specific loan programs that offer lower interest rates, quarantines possible losses if the business does not succeed, and establishes credit so if you find out you are going to grow your business larger, you are much better positioned for future loan options,” he said.
The Orthotic and Prosthetic Group of America (OPGA) also has a manual titled O&P 101, which is a template for business startup, available for purchase, that holds valuable information in terms of what kind of financial information that lending institutions might look for when considering your loan application, Clark explained.
Banks are a better option when you are looking for a larger sum of money, in the range of $500,000 or more. A good business plan is vital here. Clark suggests networking with your local banker right away.
“At some point in time, [business owners] are going to have to network with the local banker anyway so it’s time to hook up with their local banker and look into small business loans as possible options,” Clark said.
Angels or venture capitalists
Angels and venture capitalists are an option for bigger businesses – a risky option.
“Most angels want to get a quick return on their money and one of the ways that they guarantee it in their mind is…if they give you half a million dollars [for example], they are going to ask for 50% to 51% of the ownership of the company. I hesitate to even recommend that unless it is an absolute must because you are going to potentially lose control of your company,” Shephard urged.
“Insuring your O&P facility is to protect you and your employees,” Clark told O&P Business News. “You want to make sure that you have coverage for the core parts of your business.”
Don Foley, principal for Cailor Fleming Insurance, also advised potential new business owners to conduct business only with other companies with current and valid insurance.
“If a patient is injured and the company that made the product does not have insurance, then the responsibility falls on the practitioner,” Foley said. “If you are buying a product from a company that does not have insurance and that product is defective, now you have assumed full liability.”
Additionally, Medicare will not issue you a Medicare number without proof of insurance, he said.
Cailor Fleming is one of the few companies with specialties in O&P. Foley had a few suggestions for practitioners just opening a business.
Property and liability
Property and liability insurance denotes more than just the building your business inhabits, Foley explained.
“It includes everything inside the place that you are renting: from your furniture to your computers, copiers, faxes, tools and equipment, stock inventory, business interruption income and especially leasehold improvements – that is property insurance,” he said.
Property insurance is not required but highly suggested. Cash flow issues might be tight at startup, which is usually when small businesses choose to go without property coverage.
Liability insurance, however, is required by Medicare, he said.
“It is also required by every managed care plan and hospitals that are referring to you as well,” Foley told O&P Business News. “The main type of liability insurance covers the following: general liability, products/completed operations liability, and the big one that Medicare requires is professional liability which is the malpractice insurance.”
Products/completed operations coverage, included within a liability policy, sometimes slips under the radar but is one of the most important facets of your coverage.
“Most of us buy components from manufacturers and then we do some fabrication on our own and occasionally there has been a failure of components or fabrication,” Clark said. “That falls underneath product coverage. You are providing things and people are paying you for them and if there is some catastrophic failure of that prosthesis or component within it, you are covered.”
Other types of coverage
Some businesses look into auto coverage if there are company-owned vehicles as well as worker’s compensation coverage where, he advised, the rules vary by state.
Employment practices liability insurance (EPLI) is one that Foley suggests all businesses consider.
“This covers sexual harassment within the organization, sexual harassment of third parties meaning a client or a patient, discrimination, and wrongful discharge,” Foley said. “A majority of business owners don’t realize that a standard liability policy does not cover any of those four things.”
Privacy liability is a new offering through Cailor Fleming which helps to protect against identity theft, hackers, and is especially helpful given the new HIPAA guidelines.
“Privacy liability covers…the unintentional revealing of confidential information,” he said.
Foley explained that there are other liability coverages that come standard with a general liability policy. Check with your insurance provider for specifications in your policy.– by Jennifer Hoydicz
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