With all the changes taking place in the NHS, many practices are wondering how they will remain financially viable.
The uncomfortable answer is that to compete, many practices will have to improve their premises or extend the range of services they provide. This often requires additional funds to finance new equipment and staff, a difficult task in the current climate.
Nevertheless, with a good business plan – backed up by numbers, not words – and some research, GPs can still secure a much- needed cash injection.
Funding a project yourself
You may be able to fund the project out of working capital or encourage your partners to pay in to support a project, or reduce their drawings. These are quite unpalatable options (and will not make you popular in partnership meetings), but can work for small projects that very quickly start generating profits.
Funding a project yourself will be cheaper in the long run, but only if you have the funds available, as you are likely to have to pay more out in interest on a loan than you would earn if the money was invested. But not all partners will be in the same financial position. Some, typically older, partners may well have spare funds but younger partners are unlikely to.
Some partners may be in a position to increase domestic mortgages to raise their share, but that can become divisive if others are not. Given that mortgage lenders commonly now offer much better rates to people with significant equity in their homes than to those with modest equity, increasing domestic debt could be counter-productive.
If you require specific items of equipment – such as photocopiers, telephone systems and cosmetic lasers – there is the option of leasing rather than buying. This can be a simple option if you need equipment quickly and typically it avoids the need to tie up working capital of your own, and expensive loan arrangement fees.
However, lease agreements can be very expensive to terminate early so you need to make sure the lease is not longer than the expected life of the equipment. A five-year lease on something that is out of date after three years is not a great plan.
Most banks have a leasing company in their organisation, and a quick call to your bank manager will usually be all it takes to put you in touch with them. Equipment suppliers often already have arrangements with leasing companies, so it is worth enquiring about these.
If you do decide to go down this road, ensure the lease does not tie you into prohibitively expensive maintenance agreements that start after the end of the first year and don't forget you will not be able to recover the VAT. Lease costs are usually quoted excluding VAT since many businesses can recover the VAT, but typically GP practices cannot, and so it becomes an extra cost.
Before considering any commercial loan, make sure there is no possibility of using ring-fenced funds towards the project costs. Availability varies greatly across the country, often with the attitude of the primary care organisation, but if you are in an area where, for instance, practice-based commissioning savings have not been used to bail out your trust's deficit, you should consider putting forward a proposal to use them to fund projects of benefits to patients.
For instance, prescribing incentive payments are typically subject to constraints on what they can be used for, but if your plans are presented in the appropriate manner, they can be put towards project costs. However, you may find there are no funds available, or they have already been accounted for – then you need to start conversations with lenders.
Commercial business loans
For small projects, where a practice is not heavily borrowed, one would expect a bank to be happy to lend £10,000 to £20,000 per partner almost without blinking. Once the overall figure gets to £50,000 banks are likely to want to clearly understand what the money is needed for and ask to see the business plan. If you are talking about major surgery developments they will want to see a detailed business plan.
In simple terms, you should avoid borrowing on a long-term basis to fund intangible items, such as salary costs during a start-up period. If you do decide to take a loan to cover intangibles it probably ought to be for no more than two or three years since if the project is not profitable by then you probably should not be doing it.
For projects of up to £100,000 it is important that the period of the loan is generally comparable with the life of the assets being purchased or the project being financed. For example, a large practice moving from a very dilapidated PCT-owned health centre into a state-of-the-art third-party developer-owned health centre might spend up to £100,000 on furniture and equipment. Some of that will relate to technology that might have a life of up to five years while some of it could relate to furniture that would probably still be in use in 15 years' time. In such a situation, a 10-year repayment loan would make sense.
Investments in property are generally more significant, and as a result can be more complex. Once loans start to exceed £1m banks will take a great deal of interest in what income streams a practice has to support the borrowing. Although banks regard GP practices as a safe bet when it comes to lending, and charge lower interest rates than they would to other professions, the flipside is that they expect the property income streams to service the debt. Ideally they will want to see that the notional rent paid by the PCT is enough to cover the interest cost. However, increasingly that is not enough and other income streams will have to be taken into account.
Although the initial focus will always be on whether the income will cover the interest payments, practices should not forget that banks will expect loans to be repaid. While it may be possible to negotiate a few years' capital holiday, the repayments will soon start to bite. If the rent received is only just enough to cover the interest, the capital repayments will have to come out of partners' drawings.
Any interest paid on a business loan will generally be fully tax deductible, saving partners tax and national insurance at their top rate – which at the moment could typically be 42%, 52% or 62%. Since GP superannuation contributions are paid based on NHS profits they too are likely to be reduced. The calculation for superannuation contributions is particularly complex but a GP might well see their payments, after tax relief, fall by between 7% and 11% of the interest paid.
Income tax relief is also likely to be available through capital allowances, which can be claimed on what HM Revenue and Customs regards as ‘plant and machinery' and includes what practices would normally regard as fixtures, fittings and equipment. The key point is that the tax relief is claimed based on ownership; it is not affected by how you have paid for the items. The fact that a practice has borrowed £100,000 over 10 years to fund the fitting out and equipping of the surgery does not alter the fact that the tax relief starts to be given from the outset.
Some banks offer Sharia loans that are structured in such a way that they comply with Sharia law – which precludes the payment of interest. Don't get too excited though. The banks might structure the loan in such a way that no interest is paid, but that does not mean the loan will be free.
If your project really is designed to benefit the local community rather than generate extra profits, don't overlook the possibility of approaching charitable trusts. Many are keen to fund tangible projects that can be of benefit to the local community – and some have surprisingly large funds available for the right project.
Bob Senior is chair of the Association of Independent Specialist Medical Accountants and director of medical services at RSM Tenon