If you plan to seek financing for your new ambulatory surgical center this year, there's both good news and bad.

The good news: Money is available for solid projects, and more lenders are competing for your business, forcing them to be more aggressive in the terms they offer (10-year terms and limited guarantees, for example). The bad news: This is a maturing market with obvious failures. That, coupled with the prospect of declining Medicare reimbursements for certain specialties performed in ambulatory surgical centers in 2008, means greater scrutiny for loan proposals. Risk-free financing has also gotten harder to come by.

"The market has changed a bit," says James E. Chamberlin of Specialty Health Partners in Roswell, Ga. "In the old days, you could count on getting that $4 million at no recourse. The only people on the hook would be the LLC." No more, he says. Healthcare finance companies and some banks are still able to grant that option for top-tier projects, but much more common is limited-recourse financing, where the lender's decision to extend funds is based mainly on the project's assets as collateral and the expected cash flows and earnings as a source of funds for repayment, rather than on the general creditworthiness of the borrower.

In a recent deal, for instance, MarCap, a Chicago-based healthcare financing company, asked the physicians to guarantee - severally - just $1.8 million of the total $4.1 million package, which MarCap offered at 8.4 percent interest. The deal included $2 million for equipment, $1.8 million for leaseholds and $300,000 in working capital, available within the first 12 months. Peter Myhre, the president of MarCap, says his firm is able to provide limited recourse financing in four out of five deals.

How can your venture score start-up cash at the lowest cost with the most advantageous terms? These six elements are critical:

• Know your business thoroughly. Demon-strate your knowledge with a viable business plan and by being able to answer the tough questions lenders will pose in face-to-face meetings. Know precisely how you plan to achieve third-party payer contracts, how good those contracts are, how changes in reimbursement trends will affect future revenue generation and how you can overcome the obstacles presented by a non-supportive local hospital, just for starters. Stumble over these questions and you lose credibility, says Robert C. Williams, a Mesa, Ariz., consultant to ASCs.
• Think "conservative." This is true whether you're projecting the number of cases and associated revenue or determining the number of rooms your venture can support. The "too many rooms too soon" syndrome has been found to be a factor in many floundering ASCs, says M.J. Klimas, senior vice president for healthcare equipment finance at Bank of America.
• Invest in strong management. The strength of the management behind the startup and the track record of the manager or developer are two important factors lenders look at when determining the kind of deal they can offer.
• Assess the group's appetite for risk. You don't want to start a surgery center on pure debt alone, say the experts. Risk comes in two forms - the equity the physicians advance and loan guarantees. Equity contributions of 20 to 30 percent - physician-owners put up $1 million in a $5 million project, for example - are common, says Ken Seip, senior vice president of CitiCapital, a national commercial lender. "There are some situations in which a lender may be able to look at less," he says. However, one way to avoid loan guarantees is to put in a considerable percentage of the equity. If that's not possible, look carefully at the interest/risk trade-off and your group's comfort with risk. The more risk you assume, the less you'll pay in interest and the longer terms you can negotiate. Mr. Seip notes that today's financing transactions tend to be in the $3 to $4 million range, whereas they generally fell between $2 and $3 million a few years ago.
• Shop around. Don't settle for the first deal offered. There are many lenders, with many different packages, so look until you find the most appropriate one (or ones) for your needs. Not all lenders cover all aspects of financing, so you may have to spread your capital needs among different lenders. As a general rule, banks look at worst-case scenarios (collateral, guarantees and pulling copper out of the building) and finance companies look at the probability of success, says Mr. Myhre.
• Present a thorough loan request. Each lender has specific requirements, so ask what's needed well in advance of the time you plan to submit. You'll need that time, for instance, to get the necessary tax returns and personal financial statements from the principals in the venture. If you have all your ducks in a row when you apply, the lender should be able to get you an answer within three to four weeks, says Mr. Chamberlin.

How to pique a lender's interest
Obviously, a viable business plan is key. More specifically, lenders are looking for evidence of:

• Healthy case volume. "Sufficiently identified procedural volume, which is at least 125 percent of break-even revenues," says Ms. Klimas. "We're looking for a very specific ability to identify revenue sources, and we will validate those." Adds Mr. Myhre: "Provide conservative, worst-case and best-case [scenarios]. If you just provide the best case, you'll lose credibility. Since banks tend to look at the worst case, lay it out for them."
• A substantial number of doctors. "Lenders become a little uneasy with a small number of doctors," says Mr. Williams. Just one non-productive doctor can cause the venture to tank. "But if you bring in 10, 12 or 15, lenders will look at you more favorably."
• The right physician mix. "Some lenders may be interested in the age of the physicians," says Mr. Williams. "Older doctors may be financially sound, but may be looking to retire in six years. If the loan is properly secured, the financier may not care. But if they're looking for long-term success, they will be looking at the ages. You'll want some [doctors] who are young, some who are mid-career and some older doctors with very good caseloads."
• An appropriately equipped project. Again, building or equipping too many rooms can sink a project early in the game.
• Capital adequacy. The group and management team need sufficient working capital to get through the ramp-up period, says Ms. Klimas. "Make sure you have enough working capital to cover all expenses for at least nine months," says Mr. Chamberlin.
• Sufficient equity. This speaks to the group's commitment. "The more skin we perceive in the game, the better," says Anthony Mai of CIT Healthcare.
• An experienced developer with a track record of success. "I can't stress how important that is," says Mr. Seip. "When we go to the underwriting team, that's the first thing they ask about."
• A keen understanding of the market; the size, competition, political climate and payer mix. Don't overly depend on demographics, warns Ms. Klimas. "Just because you have the right population, it doesn't mean that enough of those individuals will have procedures done at your center." Further, don't assume you'll have access to payer contracts or that those contracts will pay enough to make them worth your while. Investigate, say the experts.

Compare lenders
The local bank - or a regional bank - may be the logical first choice to explore financing options, says Barton Walker, JD, a healthcare lawyer in McGuireWoods' North Carolina office. But don't stop there. Our experts advise shopping your proposal to at least two or three different lenders, since rates and terms will vary widely. Among your options:

• National banks, such as Citibank or Bank of America, both of which have specialized healthcare lending divisions. They typically have a wider range of products than niche lenders.
• Niche commercial lenders that specialize in lending to ASCs, like CIT Healthcare, GE and MarCap. Realize that the niche firms may provide financing for specific aspects of the start-up, such as equipment and leasehold improvements, but not for others. MarCap, which specializes in equipment financing and leasing, won't finance land purchases. CIT Healthcare will package together financing for permanent real estate, working capital and equipment, but does not offer stand-alone loans for the working capital or the real estate. When you make your inquiries, be sure to ask the firms what aspects they do finance.
• Equipment vendors may provide financing for their own equipment. You can also find companies willing to finance accounts receivables.

Each of the different types of lenders has its own strengths and weaknesses, says Mr. Walker. The local bank, for instance, is usually great at providing the financing for land and real estate. Local banks also tend to offer the lowest interest rates. On the downside, however, local bank staff may not be as knowledgeable about the needs of surgical centers, may require more stringent guarantees and may not be as patient with a project that hits rough patches. Tight federal regulations and requirements make it problematic for banks to carry a non-earning asset for long, says Mr. Myhre.

Mr. Mai offers this story to illustrate the point: "We just recently closed on an opportunity to refinance an ASC suffering because the prior developer did not get them Medicare certification for the first six months, so they burned through their working capital. The group struggled with a local bank that didn't understand healthcare. But we saw that the problem wasn't their fault. This group did all the right things to help themselves. Our refinancing gave them 12 months of interest-only payments to make sure they'd have smooth sailing and to make up for the receivables they lost."

Interestingly enough, "we were the highest bidder in terms of the interest rate," says Mr. Mai. CIT Group was attractive to them because they were on the hook for 100 percent of the deal for the entire term. His firm was able to release the physicians from the guarantees within 24 months, provided they met their financial targets.

The specialty firms are often able to provide expertise and more flexible terms, but at a cost. The difference in interest rates between a bank and a specialty lender can be as much as 100 to 200 basis points. At present, interest rates are running in the low sevens for local banks, and eight to nine percent for specialty finance companies, says Mr. Myhre.

When shopping for financing, the key considerations are interest rate, terms and whether there's a good match with the lender, he says: "Focusing on rates is an easy measurement to select, but not the most important. You need to make sure your lender is competitive. Once you determine that, then focus on the terms."

A basic guide to terms
Usually the terms and structure of the financing are built around the relationship between two elements, the interest rate and recourse. (Recourse lets the lender legally require repayment of a loan from personal funds if the collateral is not sufficient. In other words, if your project fails and you have to sell the assets, you'll have to cover the difference or the bank will help itself to your personal assets. This can also tie up your personal credit.)

Typically, the lower the interest rate, the higher the personal guarantee. Local banks may offer the lowest interest rates, but want the steepest guarantees. National banks typically have more flexibility. Bank of America has done deals without guarantees as well as limited-recourse deals, says Ms. Klimas. The key question concerning the interest rate/recourse relationship is how much more your partners are willing to pay to reduce the risk.

"I find that doctors usually fall into one of two categories," says Mr. Mai. "Either, ?I know it will work, I want the lowest rate possible, so I don't mind the guarantee.' The other group says ?I know it will work, so why do I have to guarantee it?' They're willing to pay more."

With guarantees, the form can vary. A "pro rata agreement" limits your liability to the amount of ownership you have in the center. A "joint and several" guarantee means you may be liable for a partner's share if the partner defaults. Avoid the latter.

"If you don't want a guarantee, you need to put in a high percentage of equity," says Mr. Mai. "In one deal we did recently, the doctors provided 80 percent of the cash. To me, that's a lot of skin in the game. They're committed. That would definitely warrant a non-recourse loan."

One of the more creative strategies in place now is incentive-based reductions. These tend to be structured differently depending upon the lender, but Mr. Chamberlin describes a typical example: "Say we borrow $2 million. Of that, $1 million is non-recourse and the other we sign on our prorated share. In two to three years, if the center is making its financial goals, a percentage or all of the [guarantee] goes away. That creates an incentive for physicians to be profitable, so they can be relieved of that $50,000 to $75,000 guarantee."

Other elements to compare are length of time required for repayment and the way repayment is structured. Some lenders offer the option of skip payments, which let you defer loan repayment for, say, the first three months, along with step payments, in which your payments are much lower the first three to nine months than they will be for remainder of the loan term. For some groups, this may create a much better match between cash flow and loan payment obligations.

Longer-term loans can also be advantageous for startups that need smaller payments, although the total loan cost will be higher. The term of the loan can extend up to five to 10 years, says Mr. Myhre. "Since you're going to be dealing with your lender for a long period of time, consider not only what it can offer you up front, but what it can help you with over the next five to 10 years."

When to start? (Sooner rather than later)
When shopping for lenders, ask the principals at other centers whom they used. You can also find reps at trade shows. Ask for references, good and bad. "Every lender has a good reference and a bad reference. Find out what they do wrong. Maybe it's not a big deal to you," says Mr. Mai.

Experts advise approaching lenders of interest once you've completed your business plan, but before you're ready to submit a loan application, says Mr. Seip. Ask them what they require for the loan proposal. Also ask them to review and comment on your business plan. They may be able to recommend professionals to help you with specific aspects of the plan.

Mr. Myhre agrees: "For the best terms, establish a relationship with the lender above and beyond getting a proposal. Help the lender understand your project. The better the lender understands the project, the more comfort it has with it, the better. If you come to the lender 30 days before you're supposed to open, you won't get the best terms."