DermatologistsDefine the transaction before collecting documents
Start with a concise transaction summary. Name the proposed borrower exactly as it appears in its formation documents and tax filings, including its legal suffix and state of formation. If the practice operates through more than one entity, describe each entity's role. For example, one company may employ staff and collect revenue while a related property company owns the office. The lender needs to understand which entity will receive funds, which entity will make payments, and which entity owns assets offered as collateral.
Identify every proposed guarantor and explain the relationship to the borrower. A guarantor may be an individual owner, a parent company, or an affiliated entity, depending on the structure and lender requirements. Provide ownership percentages and note whether an owner has authority to bind the borrower. Do not assume that a person with a prominent title is the legal owner or authorized signer. Confirm the information against current governing documents and obtain a current ownership schedule if informal records differ.
State the requested facility in practical terms: amount, structure, desired term, expected availability date if known, and whether the request is for a term loan, revolving line, equipment financing, real estate financing, or a combination. Explain the use of funds by category. A request might refinance existing debt, fund a build-out, purchase equipment, finance an ownership transition, or provide working capital. Separate one-time costs from ongoing liquidity needs. Where the amount is not final, present a range and show what drives it instead of describing it as a fixed request.
Connect each use to a source and a payment path. If loan proceeds will pay off another lender, identify the debt being refinanced and the expected payoff process. If proceeds will fund a project, provide the underlying budget and the timing of expected payments. Explain whether the owners will contribute equity and when that contribution will be available. Match each requested amount to its recipient and purpose. State the repayment source.
Build a clean, indexed diligence file
Create a secure shared folder with a simple index, a clear owner for each document request and a version label. Common top-level folders include entity and ownership; financial statements and tax records; bank activity and debt; leases and real estate, insurance, transaction details and forecasts. Use filenames that state the entity and period, plus the document type, such as "PracticeCo_FY2024_IncomeStatement." Avoid filenames such as "latest" or "final2." Keep a copy of what was delivered and record when it was sent. If a document is revised, replace it deliberately and note what changed.
Provide financial statements for the operating practice and any related borrower or guarantor entity that matters to repayment. A typical package includes monthly or quarterly income statements, balance sheets and cash flow statements, plus year-end statements. Include the accounting basis and whether statements are internally prepared, reviewed, or audited. If the practice uses cash-basis bookkeeping while the lender requests accrual information, explain the difference and ask the accountant to help produce a consistent bridge. Do not label a management report as audited or imply an outside review that did not occur.
Include business and owner tax returns for the periods requested, with all schedules and attachments. Provide year-to-date financials and the corresponding prior-period comparison so the lender can distinguish normal seasonality from a change in performance. Reconcile financial statements to filed returns when the accounting presentation differs. For example, owner compensation, depreciation, or entity-level distributions may appear differently across reports. A short reconciliation prepared with the accountant is more useful than leaving the reviewer to infer the reason for a variance.
Add bank statements for the operating accounts and any account used to collect material revenue or pay debt. If there are multiple deposit accounts, identify their purposes and the normal movement of cash among them. Prepare a list of material deposits or withdrawals that do not reflect ordinary operations, such as owner contributions, insurance proceeds, tax payments, or intercompany transfers. This does not require a lengthy explanation for every transaction. The goal is to make large or unusual activity traceable to a source document and a business reason.
Document obligations, ownership, and operating structure
Prepare a complete debt schedule for every borrower and relevant affiliate. For each obligation, show the lender, original balance and current balance; interest rate or pricing basis, scheduled payment and maturity; collateral and guarantor, plus any balloon or renewal feature. Include term loans and equipment notes; lines of credit and seller financing; business credit cards and obligations owed to owners or related entities. Attach current statements or payoff letters when available. Reconcile the schedule to the balance sheet and explain any difference, such as accrued interest or a payment posted after the statement date.
Leases deserve the same attention as loans because they create fixed commitments and can affect location continuity. Gather executed leases, amendments, renewal options and guarantees, plus schedules of rent, common-area charges and taxes, plus other pass-through costs. Identify leased locations separately from equipment or vehicles. Note renewal deadlines, assignment restrictions, change-of-control provisions, landlord consent requirements, and any pending negotiation that could change occupancy costs. A rent roll or summary is useful, but it does not replace the signed documents.
Document ownership and authority with formation certificates, operating agreements, bylaws if applicable, current ownership ledgers, and written consents or resolutions relevant to borrowing. Show direct and indirect ownership where entities sit above or below the borrower. List any minority owners and describe their approval or information rights if those rights could affect a financing. The lender may need beneficial ownership information and identity documents through its secure process. Provide sensitive personal records only through the lender's designated channel, not in a broadly accessible folder.
Gather information on assets that may support the request. Depending on the structure, this can include equipment lists, purchase invoices, real estate records, appraisals, insurance declarations, and existing lien searches or payoff information. For equipment, identify the asset, location, ownership entity, acquisition date, and any existing financing. For real estate, clarify title ownership, property taxes, insurance, current mortgages, and any environmental or title materials already available. Do not claim an asset is unencumbered until the records support that statement.
Reconcile historical performance to the repayment story
The lender starts with reported results and tests how much cash remains for debt service. Prepare a bridge from net income to the cash flow measure used in the credit request. Show each adjustment as a separate line, identify its source, and state whether it is recurring. Potential items can include interest, depreciation, amortization, owner compensation, one-time professional fees, or unusual transaction costs. Avoid grouping many adjustments under a broad label such as "other." An adjustment is easier to assess when it is specific and supported, with a low likelihood of recurrence.
Reconcile revenue and margin trends across monthly periods. Explain material changes in collections, payer or service mix, staffing expense, rent, supplies, or other operating costs at the business level. Use records already maintained by the practice, such as the general ledger, payroll summaries, bank deposits, and management reports. If revenue recognition or bookkeeping methods changed, show the periods affected and the method used to make them comparable. The explanation should clarify timing and accounting, not obscure a genuine decline.
Make sure the cash flow narrative accounts for owner distributions and related-party activity. Distributions may not appear as operating expenses, but they affect cash available to meet obligations. Related-party rent, management charges, and owner loans should be disclosed with their terms and payment history. If the proposed repayment plan assumes distributions will be reduced, state who has authority to make that decision and how the practice will preserve adequate operating liquidity. The lender is evaluating an enforceable and practical plan, not merely a spreadsheet assumption.
Use a single defined period and consistent units throughout the package. If a report is in thousands while a debt schedule is in dollars, label both clearly. Check that annual totals equal the sum of monthly amounts, that debt balances roll forward, and that cash flow measures use the same definition in historical results and forecasts. A brief quality-control review by someone who did not prepare the underlying reports can catch transposed periods, duplicate expenses, and unexplained balance differences before the lender asks about them.
Connect forecasts to evidence and assumptions
Build forecasts from a recent historical base, not from a desired loan outcome. The model should show a monthly or quarterly view that matches the timing of the project and a full-year view that makes performance easier to compare. Separate revenue and direct costs; payroll and occupancy; other operating costs, capital spending, taxes, owner distributions and debt service. Show existing debt and proposed debt separately so the lender can see the effect of the new facility. Define the cash flow and debt service coverage measures used in the model.
Document assumptions beside the forecast or in a companion schedule. For revenue, explain the business drivers and evidence used, such as current capacity, scheduled operating days, historical collections, or a signed acquisition agreement. For expenses, identify contracts, payroll plans, lease terms, vendor quotes, or known rate changes. Identify timing assumptions for a build-out or transition, including when costs are expected to begin and when the related activity is expected to contribute cash. Label estimates as estimates and distinguish signed commitments from management expectations.
Prepare a base case and a downside case. The downside case should apply a few plausible stresses, such as slower implementation, lower collections, higher occupancy costs, or a temporary increase in staffing expense. State which assumptions change and show the effect on cash and debt service capacity. Avoid a forecast that assumes every favorable outcome simultaneously. The aim is to show how the owner would recognize a shortfall and what operating responses are available, while preserving prudent cash for routine obligations.
Illustrative worked example: assume, for illustration only, a practice has normalized annual cash flow of $720,000 before debt service and seeks a $1,200,000 term loan for a build-out and equipment. Assume, illustratively, annual principal and interest on the proposed facility of $210,000 and annual payments on existing debt of $150,000. Total annual debt service would be $360,000, producing illustrative coverage of 2.0 times ($720,000 divided by $360,000). If the downside case reduces cash flow by 20 percent to an illustrative $576,000, coverage falls to 1.6 times. These figures are illustrative, not a prediction or lender threshold. The owner should provide support for both the cash flow estimate and the proposed payment, then show how delayed project spending or reduced distributions could protect liquidity if results are weaker.
Track covenants, collateral, consents, and reporting
As lender discussions progress, maintain a requirements tracker with one row for each requested item or condition. Record the source and responsible person; once established, due date and status, plus document location of the supporting document. Separate pre-approval questions, underwriting items, closing conditions, and post-close obligations. A missing closing certificate has a different consequence from a recurring reporting deadline. Review the tracker at a regular internal meeting and update it after each lender call or revised proposal.
Create a covenant summary from the actual draft documents when available. For each covenant, capture the test, calculation method, testing period, threshold, reporting date, permitted adjustments, and any cure right. Common financial tests may use a defined debt service coverage calculation, debt-to-cash-flow measure, or minimum liquidity amount. The legal definition controls, so do not rely on a ratio in a proposal summary if the loan agreement defines it differently. Assign an owner to prepare the calculation and a second reviewer to verify it before delivery.
Map collateral and consent requirements against the entity structure. The lender may request liens on business assets, deposits, equipment, or real estate, and may require guarantees from owners or affiliates. Existing lenders, landlords, minority owners, or other counterparties may have consent or notice rights. Review current agreements for restrictions on additional debt, liens, transfers, ownership changes, or assignments. Ask counsel to identify required notices and consents early enough to avoid discovering a blocking provision just before closing. Keep the request and response in the transaction file.
Plan recurring reporting as part of the financing cost. List the statements, tax returns, compliance certificates, insurance renewals, borrowing base reports, or other items the agreement requires and note their cadence. Identify who can produce each item and how long it normally takes. Set reminders ahead of the due date and preserve the submitted copy. If a reporting package depends on an accountant or outside bookkeeper, agree on the workflow before closing. A covenant can be missed through late paperwork even when the underlying business remains sound.
Compare proposals and prepare for execution
Compare lender proposals using the same principal and funding date, then compare the proposed term and amortization. Review whether the rate is fixed or variable. For a floating rate, record the index and spread. Check the floor and reset mechanics. Check the amortization schedule, balloon payment and unused-line fee. Add origination and underwriting fees, appraisal costs, legal fees, documentation charges and other transaction costs. Estimate total cash paid over a common comparison period, while showing assumptions clearly. Model at least 2 rate paths for a floating proposal. The initial payment may change after a reset.
Price is only one part of the comparison. Review prepayment rights and penalties, ability to draw or repay a revolver, grace periods, covenant headroom, cure periods, collateral scope, guaranty release conditions, and restrictions on distributions or additional debt. Consider whether the facility fits the timing and uncertainty of the use of funds. A lower rate can be less attractive if it requires a balloon before the practice expects to have cash available or imposes conditions that make routine operations difficult. Conversely, flexibility has value only if the business is likely to use it.
Compare execution steps and certainty as well. Ask what remains outstanding, who must approve the credit, which third-party reports are needed, what consents are required, and how long each step generally takes. Note whether the proposal is indicative or a binding commitment, how long pricing is available, and what conditions can still change the terms. Build a closing sequence that includes document preparation, lien releases, payoff statements, insurance certificates, entity resolutions, and funding instructions. Assign a person to each task and make sure funds flow to the intended borrower and payees.
Keep a written decision record. Summarize the proposals considered, the expected all-in cost and key flexibility differences; execution risks and the reasons for selecting a structure. Record unresolved items and the person responsible for resolving each one. Before signing, compare final loan documents to the approved proposal and have qualified legal and accounting advisers review terms within their roles. Confirm that the final use of proceeds and payment schedule; guarantees and collateral, plus reporting obligations match the business decision and the owner's understanding.
Avoid preventable diligence delays
Common mistakes include sending partial tax returns, mixing borrower and affiliate numbers, omitting owner debt, using stale ownership information, and describing a use of funds more broadly than the supporting budget. Another frequent problem is presenting adjustments to cash flow without evidence or treating a forecast as if it were historical performance. Each can trigger additional questions because the lender cannot tell whether the discrepancy is harmless, material, or still undiscovered.
Avoid responding to diligence requests with conflicting versions from different people. Choose one coordinator to route questions, retrieve source records, and check that answers agree with the data room. When an answer is uncertain, state what is known, what is being verified, and when a supported answer can be provided. Do not guess at legal terms or promise a consent that has not been obtained. Keep communications factual and correct mistakes promptly with a clear explanation of the revised information.
Do not wait until a proposal is selected to discover that a lease expires soon, a lien needs a release, or ownership approval is required. These issues can affect timing and terms even when the practice performs well. Likewise, do not compare a short-term interest rate without modeling the full amortization or fees, and do not overlook post-closing reporting requirements. A diligence file should help the owner see the complete obligation alongside the cash received.
Action checklist
- Write a transaction summary naming the borrower and owners, guarantors, requested facility and amount, plus use of funds.
- Index current financial statements, tax returns, bank records, debt schedules, leases, entity documents, and ownership information.
- Reconcile historical cash flow and balance sheet differences to source records; label every adjustment.
- Prepare base and downside forecasts with documented assumptions and separate existing from proposed debt service.
- Track covenant tests and collateral; consents and closing conditions; recurring reports, responsible owners and deadlines.
- Compare proposals for total cost, payment structure, flexibility, guarantees, execution certainty, and ongoing obligations.
- Review final documents against the selected terms, confirm the funding flow, and retain a complete copy of submissions and signed records.
Questions about your own practice? Contact Richard@DoctorsInvestorClub.com.
