Pharmacy Lending for Start-Ups with First Financial Bank

With higher interest rates, are pharmacy start-ups still happening? Yes! But working with a niche pharmacy lender can go a long way toward supporting your start-up pharmacy dream.

In this episode of The Bottom Line Pharmacy Podcast, Drew Hegi with the pharmacy lending division of First Financial Bank shares what he is seeing in pharmacy lending for start-ups and expansions. He also alludes to the need for cash reserves and possible capital outlays to prepare for DIR fees in 2024. But even with a pharmacy niche lender, you still need a solid business plan and the internal fire to succeed. The dream is possible with the right lender and a pharmacy CPA advisor.

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If you prefer to read this content, the video transcript is below.

Scotty: Welcome back, everybody, appreciate everyone listening in to The Bottom Line Pharmacy Podcast. Today we have a very special guest, Drew Hegi with First Financial Bank. Did I get that right, Drew? I’ve said it a hundred times.

Drew: Yeah, Scotty. You nailed it, man. You nailed it!

Bonnie: It’s better than what people usually do to that. So pretty good. Yeah.

Scotty: So first Financial Bank here. Drew, glad to have you, appreciate you getting on with us. You know, we do a lot of work together with mutual clients and so on and so forth to see you out on the trade show circuit. Give us a little overview of what you guys do, for the listeners.

Drew: Yeah, so absolutely. Thanks for having me. Good to see you guys. I haven’t quite kicked off the trade show season yet, but it’s right on the horizon, so we’ll be out there before long. So I’m a loan officer at First Financial Bank in our pharmacy lending division. Been in this role since 2012 so 11 years now we’ve been lending money to pharmacists for business purposes to buy stores.

Majority of what we do is store acquisition financing start-ups. We have certainly been the leading financial institution doing start-ups over the last decade or so for those that want to start their own pharmacy. And then we do a variety of other financing needs, whether it be expansion, refinancing business debt, consolidating accounts payable things like that, and working capital for growth.

But First Financial Bank’s a great partner and a great community bank for independent pharmacies. And we do primarily SBA, Small Business Administration lending. We’re a preferred SBA lender, lending in all 50 states. And then we have a solid pharmacy team. Bo Garmon and I are two pharmacy lenders at the moment. We’re about to bring in a third and then Schwanda Flowers is our managing director. She’s actually a pharmacist and oversees our veterinary lending division and also our pharmacy lending division. So she provides good leadership for us in that way. But yeah…

Scotty: How long have you been at it, Drew?

Drew: You know early 2012 is when we kicked this thing off. And so we’re over $300 million in pharmacy loans originated to date, which is a really good number we’re proud of. Customers all over. We haven’t quite loaned money in all 50 states yet. We’re so close just need to get those outliers Alaska and Hawaii knocked off and we’ll be almost there.

Bonnie: You’re like us. We’re counting down. We’re like “We’re 45 states” but not quite there. Yeah.

Drew: We’re close. But yeah we’ve got all the trade shows each and every year, a lot of preferred partners. I certainly enjoy working with you guys, have a lot of mutual clients. And so it’s, it’s been a good run.

Bonnie: I was going to say, you guys have definitely done a lot over the past decade working with us, with some of our clients, getting them going with start-ups and transitions. Always nice to use a pharmacy niche bank.

Drew: Yeah, I mean, I think it’s almost imperative, especially at the onset. Certainly, you can bring in the local bank as you’re more established in either you know, there’s not the transitional risk that you have when you buy a store or the need for working capital that you have when you, you know, purchase a business. Or you know, if you’re struggling, if you go to a local bank, I mean, we all know we’ve seen it. It’s just a dead-end road. Yeah, certainly the local bank that you know and are in the community with become more of an option once you’re established, you kind of hit that three-year mark of positive cash flow, then you have more options. But it’s so important, you know, at the onset to find a pharmacy-specific bank. You’re just going to alleviate a lot of headaches and a lot of time.

Scotty: I can’t tell you how many times I’ve heard pharmacies go with a local option. At first. And then they say every time, I don’t know what I was thinking; I should have gone to a pharmacy niche bank route every time.

Drew: Yeah. And it’s a good thing for us because it can really be a tool, a resource. We can kind of walk them through the process. It’s a benefit for me and Bo as loan officers because we’re just working with one type of industry. We’ve basically seen every type of loan request out there at this point in time. I’ve basically seen every type of tax return, financials, and challenges and you know, how to make a deal work and understand if you take that to the local bank that doesn’t do pharmacy each and every day, it’s just going to be a lot of work on your end.

And even when you do all the work, it probably doesn’t end up in the result that you want it to. So we always encourage folks to, you know, find those pharmacy-specific lenders. And I know you guys, too. It makes the most sense for this industry.

Bonnie: Yeah. It’s two big areas that I see it and it’s normally obviously in the beginning, you guys know how to make sure that that working capital is there the right amount. We see that lacking with local banks and not because they are trying to be tight or not. I think they just don’t understand it. They don’t understand how a pharmacy operates.
And then obviously a lot with, we see this a lot with our start-ups is some of them grow very quickly, which is what you want to do, but you run out of money very quickly. And then when they have to go back and ask for money, nobody understands how you could possibly need money again in three months, six months.
And it’s much easier to have that conversation with someone that understands.

Drew: Yeah, I mean, one of two things is going to happen. You’re going to go faster than you thought or slower than you thought. Either way you go, you need to make sure you have working capital in the bank to sort of weather those storms. The fast-growing ones can be very problematic. And they… but if you can bring them, you bring those numbers back to a bank that understands what’s going on, they’re going to support you. You bring that back to the local bank, and they’re like, “Well that’s, we did all we could do. And good luck.”

Kendell: Yeah. I had a situation where the local bank said, “We understand you need money, but we’re going to ask that you now give us a certain sum immediately.” Like what? They were growing. Everything was positive in the bank and they asked for more money, and the bank said, “Well since you’ve run out of money, we want $100,000.”

Bonnie: Yeah, it’s too much.

Drew: That is stressful. That is stressful. And I do think with, especially with rising interest rates and the environment that we’re in right now, which is really unlike anything I’ve seen in 11 years, I mean, we operated when the prime rate was three and a quarter for forever. You have three and a quarter prime plus 1.75%. You’re at 5%, you know, that’s such a reasonable rate, great rate historically.

And now we’re at, prime is 7.75%. And so it’s just a different environment. So for those established stores, I do understand, the appetite to refinance and to get to go to your local bank and look for that lower fixed option. And we encourage people to do the best thing, you know, for their business. You have to look at anything and everything because, you know, with DIR fees out there and interest rates, there’s just, you know, margins.

You got to find your cash flow where you can find it. And certainly, debt service is one way to do that. And so it’s kind of interesting times right now and we’re kind of navigating that. But, you know, still working with a pharmacy-specific bank is your best bet.

Bonnie: We’re definitely seeing those conversations. People are starting to ask, you know, just thinking about doing that, making that move.

Scotty: So Drew how are those rising interest rates impacting you guys and what you’re seeing in the marketplace today?

Drew: So on the new loan origination side, we’ve actually, and I was really every time the calendar turns over, I’m like, how are we going to find, you know, our deals each and every year, you know, hope the phone rings, but our existing customer base, new people find us on top through a podcast or through websites or different things that we’re doing, trade shows and then just have to keep tapping.

And I was more nervous this year than I ever was because of interest rates, like who’s going to be borrowing the money right now? That’s going to cause a lot of people to pause, and rightfully so. But if you buy right, if you evaluate cash flow correctly, these opportunities just don’t come about that often. And so it’s still the right time to act on an opportunity if you have one.

Even though interest rates are where they are, there are just not that many independent pharmacies that you have the opportunity to buy, or if you’re starting one, maybe at the right time, you’re backfilling a situation. It’s still a smart business move to move forward with that. So I have been very encouraged by the number of applications that we’ve received. So far almost three months this year. And I think volume-wise we’ll be in a great spot. We are having to have that conversation of, you know, you got to make sure that the debt service is there, the payments are higher.

I know we want to talk about start-up. So if you borrow $500,000 at 5%, your payment’s basically $5,300 bucks. If you borrow that same $500,000 now at 10%, it’s about $1300, $1500 more a month, and that’s $15,000, $16,000 more a year that you have to pay to the bank, that you can’t leave that money in the business or, you know, pay your employees or add or use for growth. So it’s definitely something to consider for some of the start-ups because you’re not getting more money. You can’t charge customers necessarily anymore. You’re not getting reimbursed from third parties anymore.

Scotty: It’s a whole other dynamic being thrown on top of pharmacies right now. That’s for sure.

Drew: It is. And it’s tough. It’s unfortunate. And I think eventually I hope it’s going to come back down, but it’s not anytime soon.

Bonnie: Another reason why we, like, we talk about all the time is that you have to diversify your income and figure out other ways to, you know, to bring in money.

Drew: Yeah, you’ve got to be flexible.

Bonnie: You’ve got to do something else.

Scotty: You got to. It takes a lot of work to be a pharmacy owner in today’s environment, but there are pharmacies out there doing it, that’s for sure.

Drew: And it’s so crazy when you hear stories of people that took advantage of an opportunity in their community. And those things you go to tradeshows, your network, you find out what other people are doing and you can’t necessarily implement all of it, but you can certainly glean a lot of it. And every community is different, every landscape is different. And so what is the right opportunity for this one pharmacy owner in Alabama may not be the right opportunity for this pharmacy owner in Utah, but there are things that you can learn, can grasp, can implement. And you just got to be very in tune with ways, other ways that people are making money outside of just filling scripts.

Bonnie: And every community is different. You know, just because one pharmacy says I have success with this particular thing, it may not work for you and vice versa.

Drew: Is there a top view sort of diversification, strategies that you guys have seen that you’ve like been impressed with clients? I think COVID provided a ton of opportunities and different people to, you know, definitely the range of a lot of that stuff.

Kendell: I think what comes to mind immediately is sometimes it’s very community based, but sometimes if a client gets into a certain client base, like some will be servicing diabetes patients that’s really heavy in their community. And then they get that, they do a lot of education and then they get those scripts and then other scripts that come with it. So sometimes it’s being really mindful of your population that you’re going after. And then what I’ve seen from my client base is some they’ll find whether it might be a long-term care type situation or a 340B situation, but they’ll find what’s working in their area and what can be. Not only can they get a volume, but what they can make profitable, and they’ll shift their total…not every portion of their business, but at least a significant portion of their business towards that profitable area.

And it really helps them out. But I’ve seen some pharmacists that are not as diligent in focusing their energy and they’re like, I’m doing a few long-term care. A few 340B small contracts. So, you know, they’re just kind of all over the place and they don’t really know where they’re profitable. They’re not really growing the profit center. So sometimes it’s not extremely creative, but just the main niches figure out what works in your community and then be willing to invest that time in it.

Bonnie: Yeah

Scotty: Yeah. I mean, I’ve definitely seen long-term care. A lot of pharmacies jumping in on that, compounding, you know, getting to 20, 30 compounds a day can make a big difference. So we’re seeing a lot of that. We’ve seen some pharmacies that are cash.

Drew: Yeah, you’re not waiting and then require a ton of working capital sort of.

Scotty: And there seems like there’s a lot of, you know, a lot of pharmacies I talk to, there’s a lot of opportunity for compounding to get your foot in the door, of course, non-hazardous non-sterile type stuff.

Bonnie: Gets a lot of people doing point-of-care. You know, we’ve got some clients doing, you know, blood draws right there in the pharmacy and figuring out supplements — really replacing the need for the Rx that they’re filling; some of those things get expensive.

Scotty: We got one that comes to mind that has a functional medicine pharmacist on staff full-time consulting. Sitting there consulting with patients all day long, booked out. And then, of course, they walk out with $300 of supplements a month.

Bonnie: Cash

Scotty: It’s things like that.

Bonnie: Replacing their blood pressure medicine that they were taking, that maybe you weren’t making anything on. CBD was big for a while. You know, we see some still doing, really doing a lot with that.

Drew: We’ve got also pharmacies that do well with that.

Bonnie: We’ve got a lot of people looking into bringing in…actually, we talked last week with a pharmacist looking at bringing in, you know, a PA on staff.

Scotty: Nurse Practitioners, yeah.

Bonnie: Yeah. To just meet with patients for, you know, the common thing, in some of the states that you can, the common cold and flu and whatever and they’re able to test and deal with those and consult and fill scripts for that.

So yeah it’s definitely different than just the norm.

Scotty: Are y’all seeing a lot of that, Drew? The clinics in the pharmacies? I mean, are you seeing a pickup in that?

Drew: I can think of a handful that comes to mind, but not anything, you know, like this massive movement where, you know, it’s like the wave of the future. But it could be. But I haven’t necessarily heard of that or seen that implemented widespread across our customer base.

Scotty: Yeah. It seems like that’s starting to get some traction in there.

Kendell: I got a question that’s a little bit of a different direction coming off of the whole COVID. You know everybody, some pharmacies jumped on that, got a big revenue push, big income push, but now things are getting more normalized. Are you seeing some people reaching out to the banks again because the cash flow situation is different than it was the past two years?

Are they reaching out thinking, you know what to do now and thinking about next year with the DIR fees? Kind of we’re in the middle portion where the big wave of income and then now that big expense is coming. Are they talking to you and planning this at this stage?

Drew: Yeah, we’re I mean, I would say most of the calls coming in right now are interest rate concerns. That’s number one, rightfully so, because you know, every time the Fed gets together, they want to crank that thing up another 25 basis points. And then we do know that next year can provide a lot of uncertainty and could be some significant DIR fees that will be experienced by our customers. And so they are mostly flush with cash, more so than they have been in the past. We’re just really encouraging owners to manage that cash properly and keep it in the business.

Bonnie: Preparing for it.

Drew: Preparing for it. Putting it on their radar, make sure it’s on their radar and make sure they don’t end up in a spot, you know, the first quarter of next year where they need money and need money quick. Because we’re good about supporting our pharmacies, but this is not your 24-hour, 48-hour money advantage place. It definitely-I mentioned SBA loans are what we do and those just take some time.There’s some paperwork.

Drew: And I do think we’ve heard encouraging things at the last SBA conference that we went to that will make especially smaller loans, loans under $500,000 much easier, much quicker. The attainability and the processing time will be cut down on those. And so we’re sort of waiting for more guidance on how to implement that and process that from the bank standpoint.

But hopefully we’ll have some of, you know, when all this sort of happens next year, we’ll have those programs in place for those customers that do need, you know, to bridge that gap with working capital.

Scotty: So you are looking at some potential options there at the bank to kind of be a short-term bridge for them?

Drew: Right. I mean, I think it’s nice that these roll-outs are coming from SBA. The timing of it is good. And also it’s just been prudent on our part as a bank to have that on the forefront of our mind so we can best support our customers as they’re, you know, rolling into next year that we’re the right partner for them and have them on whatever the business needs from a financing standpoint.

Bonnie: Definitely start those conversations there. People are starting to ask, what are we going to do? Should we go ahead and try to get some money? And so they are definitely concerned.

Scotty: It’s definitely going to pick up, too, as it gets closer.

Drew: It’ll be the talk of the summer. I feel like when you’re out of NCPA in the fall and trade shows that are, that we go to in the summer, I feel like that’ll be the buzz of what to expect.

Bonnie: Going to hit right at tax time too guys. You know, March-April time.

Kendell: People are thinking about it with their tax return this year; they’re trying to keep more money. Usually, people want all their money out if they have it, then I see a lot of people keeping a lot more money in the pharmacy this year.

Drew: Yeah those EIDL loans were nice and good to have and hopefully those are still sitting around and available. I know you’re paying interest on it, but it’s, you know, it’d be worth it to keep it around for another 12 to 14 months just to make sure.

But yeah, overall the portfolio’s holding up really nice. We’re still doing start-ups, even though, you know, I’m about to close one here, that’s just for your backfill situation. We love those. The phone’s still ringing. We could do two start-ups a week, it seems like, but we’re not going to do that. But we do want to do the good ones that make sense that we feel are a good fit.

Scotty: Yeah, what are you looking for in a start-up, Drew?

Drew: Not, not a hit and hope. Like some real tangible, like this is why we’re going to be successful. Not just because, you know, the community is going to love us, when we’re in the service is going to be outstanding. But there are two other independents right there doing good service and doing good business.

You know, the one where the old owner sold out to one of the chains and that’s what this is, that backfill of those two independents: one sold to CVS, one sold to Walgreens. Right now this town has no independent left they’ll, that situation will be great and that’s the one where, you’re like, that can grow really fast and we want to make sure that we have enough working capital in their bank account to weather that storm, if that’s the case.

And there are other scenarios as the stock back fills, that we’ll do. One is if somebody just has decent cash reserves and it may not be the most, but it has a good personal financial statement, they’ve managed their money properly. They’re not going to call us the first time they run out of money because they have personal reserves that they’re willing to put into it and they’re, you know, financially invested into it, not relying 100% on us.

Those types of deals are good. You know, when the spouse has good outside income, where, you know, if you can take a lesser-than-pharmacist salary and that’s what you want to do and to get away from working in a chain, you know if you work as the pick for $50,000 as opposed to [$120,000], that creates $70,000 of cushion and margin there, I mean, that’ll work, it may not be the smartest thing for you to walk away from a job, but your work-life situation may be miserable and you may just want something else. And then you know what, you want to bet on yourself. So a variety of situations, certainly expansions when you have an existing store and you want to start at a second location, third location, those are always good loans for us to do.

But, you know, I’m always a phone call away and happy to listen to each and everyone’s plan. But like I said, we just can’t do them all.

Bonnie: One thing that I’ve noticed over the years, I’m sure you might agree, I’m just curious, is that the ones that I see that have been extremely successful, it seems to me that pharmacy owner, you could tell from day one that they kind of had the fire in their eyes. I mean, even before you heard the plan, you just kind of had a gut feeling that they are going to make this work.

Drew: That’s such a real thing. It’s hard to say that out loud, like when you just, you know, what do I need to do to get approved? Well, you know, you have to have a fire in your eyes.

Bonnie: You know, you just had that first call and you’re like, man, this guy’s going to kill it. Like, you just know.

Drew: This guy really knows his numbers, he’s not doing something dumb. And this is a calculated sort of plan that he has. And you can just, like, they’re just wired in the way that this guy needs to be a business owner. He needs to be in the driver’s seat somewhere.

Scotty: And that goes back to the point we were talking about earlier, where, you know, in the pharmacy world today, you’ve got to be that entrepreneur. You have to have that spirit in you.

Drew: If you have that spirit, I still believe community independent pharmacy is a great vehicle for you to be in, especially if you’re a pharmacist. It’s still completely viable. And you guys see that you know, as you’re looking over financials each month and we see it as we’re looking at stores and, you know, existing customers that come back to us for expansion. They have to have that entrepreneurial spirit.

And it’s, they will be successful, and it happens and we see it. And so it’s still a great path. You just, it’s not for everybody.

Bonnie: Yep.

Scotty: Are you seeing an uptick in the expansion loans? Has there been kind of, post-COVID, people trying to get out, especially like where the industry is today where DIR fees are and people are just like, I’m getting out? Are you seeing kind of an increase?

Drew: We are. And we’re seeing, we’re doing several right now, way more than normal file buys where I feel like this is like a typical scenario. You got two independents in town, one’s older and he’s just, like you said, kind of post-COVID over it, ready to move on. And he’s like, who’s he going to sell it to? Well, I’m just going to call the other pharmacist in town and see if they want to buy me. And it doesn’t make sense to have two locations in one town, but just move, buy those scripts and move them over, and then close the one, move all those patients over, and have the one pharmacy in town.

So we’ve done a few of those here lately where I feel like, you know, the local pharmacist that’s older is just kind of saying, all right, ready, ready to be done. And who does this make sense to sell to? Which is great. I mean, that really adds some profitability to, you know, the remaining buyer store because they’re going to keep a lot of their payroll the same, obviously bring in some new team members. But yeah, not two rents, not two insurance policies, that kind of thing. And you can really add some money to the bottom line that way. So we’ve seen some of that. We’ve also just seen your traditional, “Hey this person, you know, we’ve heard that they’re wanting to sell, I’ll reach out to them.” You know, “We’re going to take over their entire business and keep their staff” and that kind of thing, too. So far, so good. I mean, I was like I said, I was worried about 2023 from a volume standpoint, but you know knock on wood, we’re in a good spot. Pipeline looks good.

Scotty: That’s great. Yeah. There’s still a lot of opportunity out in pharmacy and we’re seeing it, I know on our end what our pharmacies are doing. So-

Bonnie: Yeah, it’s always changing. You have to adapt, figure something out, keep rolling.

Drew: It’s interesting to watch all of that happen, you know, like cross country and different people and, you know, people that you’ve had a relationship with for a number of years. See what they’re up to and what they come back to you with. It’s cool to see. I mean, you know, when you start in the pharmacy division, like we talked about, in 2012 from scratch, like we didn’t have a pharmacy loan on the books, to my knowledge.

And so, you know, we did several, you know, helping folks start their own pharmacy, buy their own pharmacy back in 2013 and look at what they’ve done over that span. Not only have they paid off their loan early, but they’ve also bought three other ones, you know that thing, you know, so you just get cool situations like that and yeah, it’s a great business and a great opportunity. So it’s fun to watch those stories unfold.

Bonnie: I know I joke with people all the time, clients that kind of are in there, you know, they’re like “If I could ever get this loan paid off,” you know, they’re just like year three or four. And I’m like, “You’re never could get your loan paid off because you’ll get it paid off and then you’re going to buy another store, then you’ll have another loan, then you may have two stores, four stores, and they’re like, “No, we can’t even think about that.”

And I’m like you will. And they do.

Drew: They will.

Bonnie: They start down that road; they start making phone calls and all it takes is somebody that walks in the store. I mean, we have calls like that all the time if they hear a rumbling that something’s happening down the street or and just, you know, a second. All of a sudden they’re buying a store.

Drew: We’ve just now, you’ve got some that’ll pay it off early. You’ve got some that are like no I’m taking this thing here. Most of our loans are ten years so I’m taking this thing 120 months. And like, they’ve started clicking off just, you know, their natural maturity date. Loans we did back in 2012 and 2013, 2014. So, you know, I mean, if you don’t have debt service on these pharmacies, you can make a lot of money.

Like that’s when it really gets good. Ten years go by faster than you think. Not really but kind of. I don’t know if that’s true or not but like eventually going around and ten years passed and you get the pharmacy without having these debt payments of $10,000, $12,000, and then all of a sudden you’re making an extra $100,000. Yeah, it’s huge, it’s good.

So you’ve got those stories that are cool. Like you made it, this is kind of what you worked towards, good for you and you know, you kind of celebrate that with them.

Scotty: Yeah. And then you’ve got tax problems and then we got retirement plan options. So then the whole, a whole other door opens.

Bonnie: It’s always something.

Drew: You use that interest expense and all of a sudden that tax bill’s a lot higher than anticipated.

Bonnie: Yeah. You always got to find something to replace it with.

Drew: Yeah. That’s what you guys are for.

Bonnie: That’s right.

Scotty: Exactly. Drew, I appreciate your time today. I guess we’ll wrap this thing up. It’s always a pleasure having you on our podcast this time, webinars whatever you want to call it. Look forward to seeing you out on the road, man.

Drew: I enjoyed the discussion. Thanks again for having me.

Bonnie: Thank you, Drew. See you around this summer.

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