Recent developments in the Pharmacy Finance Market

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Recently ANZ bank communicated to the market a clear intention that they wish to lower the LVR (loan to value ratio) for pharmacy to 60%. ANZ will still consider higher levels for low risk clients or pharmacies.

This is a clear signal of the perceived pharmacy risks by banks as well as an indicator of the current financial markets climate.

I believe other lenders will follow suit. Is this an early warning sign of things to come?

Some of the signs I have noticed recently are as follows:

• Aggressive pharmacy lenders are now lowering the percentage they are willing to lend to pharmacists. In the past it was not uncommon for some lenders to lend 80% to 90% on an interest only basis for three years. Now that this interest only period is expiring and principal payments are due some pharmacy owners are feeling the pressure. The answer used to be to simply refinance with another institution and start the interest only process again. However banks are reluctant to lend to such levels. If the pharmacy has had stagnant growth then these businesses may be finding themselves in a tight spot.
• Bank flexibility is reducing. Pharmacists who have been used to a strong negotiating position when dealing with banks will not find it all going their own way. Credit departments within banks are no longer allowing criteria to be relaxed. They are demanding strict adherence to their policies and are standing firm. Additional conditions such as partner cross guarantees are no longer negotiable. Pharmacists are going to need to understand that in this current climate they will not be able to make demands they have been accustomed to.
• Banks are increasing risk margins (i.e. charging higher interest rates to reflect risk of each client or pharmacy). In the majority of cases the standard fee and interest rate structure changes depends on the risk profile attached to each individual/business. Whether right or wrong, from the banks perspective risk has increased. Even relatively risk free clients are attracting higher margins. Marginal deals are now attracting much higher fees and risk margins. The more aggressive banks are ramping up rates and fees because they know there is little choice from other lenders.
• More and more institutions are reviewing their loan portfolios to identify risk. If you are identified as an increasing risk the bank may target you for review. They might do this by requesting a revaluation of the pharmacy, reviewing financial information or requesting specific information. If you are seen as too great a risk the bank may ultimately look to have you re-finance somewhere else. Given the current climate this might mean your finance may come at higher cost.
• Conditions such as periodic reviews of financial information are becoming more commonplace and are finding their way into more and more contracts.
• The serviceability requirements of some banks are becoming stricter. As seen throughout the market rising interest rates has decreased serviceability levels. If profitability in your Pharmacy is trending downwards or is limited you may find your pharmacy coming to the attention of your lender.
• Overdraft facilities are being closely monitored for signs of cash flow problems. If you overdraft seems to be growing Banks will take action. You may be asked for budgets or plans of action to address such concerns.
• In previous articles we have discussed the fact that applications are becoming more onerous. This is highlighted by closer scrutiny of applications, higher information required in applications, and, increased number of conditions.

Overall evidence suggests that bankers are becoming increasingly concerned about ill prepared business owners (finance applicants) seeking high levels of borrowing and are reacting by tightening policies. The banks are also expressing concern about the prices being paid for poorly performing pharmacies.

So what do you do?

• First and foremost concentrate on improving your business. A business owner who is operating at peak performance will rarely get questioned. Are you being efficient as you can be?
• Understand the current environment has changed.
• Look to develop long term relationships with Bankers who understand pharmacy and have flexibility. Avoid those banks that are hot and cold in the industry or are just chasing market share.
• Consider using finance brokers when making an application. A finance broker who is a specialised in Pharmacy can help paint a much better picture of your pharmacy and attract the most attractive risk margins leading to the best deal for you.
• Make sure your accounting / financial information is accurate and up to date. If you cannot maintain your reporting on a timely basis, how do you think the bank can possibly perceive you to be running your business efficiently?
• Promptly give banks information when asked. Present the information in a professional manner. Be prepared for any questions.
• Put in plan budgets, plans of action to show your ability to repay debt in the future. This is good business practice and should not be just put in place being your lender is asking for it.
• Closely monitor cash flow. Cash flow budgets should be in place.
• Use consultants such as accountants to help you show banks you meet their desired criteria should you come under scrutiny.

Medici Capital, industry leaders in pharmacy valuation, finance & management consulting. Helping pharmacists achieve their goals. www.medici.com.au