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Getting Loans and Investors for Your Healthcare Business

By Spodek Law Group | February 20, 2024

Getting Loans and Investors for Your Healthcare Business

Starting or expanding a healthcare business requires significant upfront costs and ongoing investments. While bootstrapping with personal savings is an option, most entrepreneurs need additional financing to launch and grow a viable company. Loans and equity investments can provide this critical capital, but securing funding is often a major hurdle for healthcare startups.

Assessing Your Funding Needs

Before approaching lenders and investors, the first step is to thoroughly assess your funding needs. Consider the following:

  • Startup costs – This includes expenses like real estate, equipment, inventory, licenses, payroll for staff to get set up. Create detailed financial projections to estimate these costs.
  • Working capital – Ongoing operating expenses need to be covered before revenues pick up. Estimate your operating cash flow needs for the first 12-24 months.
  • Growth plans – Expanding locations, adding new services, marketing campaigns all require significant cash. Forecast different growth scenarios and how much funding they would necessitate.

Document your assumptions and financial forecasts in an investor pitch deck. This will communicate how much money you are seeking to raise and what the funds will be used for.

Loan Financing Options

Debt financing provides the advantage of retaining full ownership and control of your company. Loans typically need to be repaid within 1-7 years with interest. Some options to consider:

  • SBA Loans – The Small Business Administration offers various loan guarantee programs to encourage lending to startups. Popular options include 7(a) loans up to $5 million and 504 loans for major assets.
  • Bank LoansLarge national banks and local community banks offer term loans and lines of credit to small businesses. They look for sufficient collateral and strong personal credit scores during underwriting.
  • Alternative Lenders – Also known as FinTech lenders, these online lenders can approve loans quicker by using data analytics during approval decisions. However, interest rates are often higher.
  • Peer-to-Peer Lending – Websites like LendingClub allow you to borrow from a pool of individual investors. This expands financing options but requires paying loan servicing fees.
  • Equipment FinancingLeasing companies can finance essential equipment for healthcare providers through lending options that defer payments until the equipment generates revenue.
  • Receivables Financing – Funding against unpaid customer invoices can help manage cash flow gaps. Companies like BlueVine offer credit as high as $5 million per month.

Equity Investments

Equity financing involves selling partial ownership shares in your company in exchange for investment capital. While you give up full control, equity financing does not need to be paid back if the business fails. Some approaches to consider:

  • Angel Investors – Wealthy individuals provide seed funding to startups to help them launch and grow. AngelList makes it easier to connect with individual investors. Expect angels to ask for 10-25% equity.
  • Venture Capital Firms – VCs like NEA and Sequoia invest in high-growth startups planning to eventually go public or get acquired. VCs require anywhere from 20% to 60% ownership.
  • Private Equity Firms – PE firms like Welsh, Carson, Anderson & Stowe specialize in later stage, profitable healthcare companies looking to scale rapidly. They buy majority control in leveraged buyouts.
  • Strategic Investors – Health systems, insurance companies, and pharmacies invest equity in startups that could become strategic partners. For example, CVS Health Ventures focuses on digital health products.
  • Revenue-Based Financing – This newer option, offered by alternative lenders like Clearbanc, provides capital in exchange for a percentage of future revenues until the money is paid back with interest.

Presenting Your Business Effectively

To convince lenders and investors, you need a polished presentation that covers all the key areas they will evaluate:

Executive Summary – Overview of your business model, growth roadmap, competitive advantages, leadership team, and funding amount being requested.

Market Opportunity – Demonstrate a large, growing addressable market with strong industry drivers. Provide statistics on consumer demand trends.

Your Solution – Explain your healthcare offering and why it solves a major patient pain point or provider need better than alternatives.

Business Model – Break down your pricing structure, patient/provider acquisition funnel, and recurring revenue streams. Show how unit economics can work profitably.

Traction & KPIs – Share evidence of early product adoption and usage metrics indicating you have achieved Product-Market Fit.

Competition – Analyze the competitive landscape and how you differentiate. Assess strengths and weaknesses of competing solutions.

Go-to-Market Plan – Detail your patient/provider marketing strategy, sales process, and expansion roadmap. Provide geographic and demographic targets.

Management Team – Highlight your leadership’s healthcare, finance, operations and technical expertise. Investors bet on teams over ideas.

Financial Projections – Create 5 year profit & loss, balance sheet, and cash flow statements showing the funding needs, growth drivers, and path to profitability.

The pitch deck should visually communicate your plan on 20-30 slides. Be prepared to present your healthcare startup’s vision and growth prospects in an engaging 20-30 minute presentation.

Final Tips for Securing Loans & Investments

Here are a few other tips to help secure the best financing terms from lenders and investors:

  • Build relationships first – Meet with multiple financing partners early on. Get feedback to refine your business plan and financial model.
  • Understand the criteria – Every lender/investor has different requirements and specialties. Make sure you meet their guidelines.
  • Shop multiple options – Having competing term sheets from several partners enhances your leverage in negotiating the best possible deal.
  • Highlight risks upfront – Discuss market threats, technical challenges, regulatory issues early so you can explain your mitigation plans.
  • Be flexible – Most term sheets require some negotiation. Be creative in offering alternatives that still meet your core needs.
  • Move quickly – Fundraising processes have momentum. Push to close financing quickly once you have interest.

Raising money is challenging but absolutely essential for any healthcare startup. Following this playbook to create a compelling funding presentation can set your new company up for success. With smart planning and persistence, you can secure the necessary loans and investments.

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