Pharmacy Start-Up Costs: Financing

There are significant financing requirements to start a pharmacy business. Ollin Sykes, CPA and Bonnie Bond, CPA of Sykes & Company, P.A. discuss the minimum investment needed and why a pharmacy niche bank is important to the success of your pharmacy. Pharmacy lenders understand the industry, pharmacy start-up costs, cash flow needs, receivables and how this all works for independent pharmacies.

Watch the video to hear:

• What you need to consider when planning your initial investment needs;
• The benefits of a pharmacy lender over your local banker; and
• How to plan for growth during your initial investment planning.

Be sure to watch the other videos in our series Pharmacy Start-up Costs:
Entity Selection and Timing
Leases/Facility Planning

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

What types of financing should be in place for a start-up?

The financing and the requirements for a start-up pharmacy are rather large. Bonnie and I will tell potential pharmacy owners at the NCPA Ownership Workshops, that you need to have a minimum of half a million dollars of either debt or equity or combination of debt and equity available. In many respects, you may need even more. Once you inject and/or borrow that initial money for the start-up pharmacy, you will be tying up all the assets of the entity. You will probably be having to personally guarantee, especially if you get an SBA bank loan from a pharmacy niche bank. And you will not be in a position to borrow further and future monies until you are most likely cashflow positive, unless you have got angel investors or family members that will be desirous of injecting further funds into the business. But, you need to clearly plan on a significant amount of money that’s needed. And now, we constantly get hit with the fact, “well, I can do it for a quarter million dollars” or “I can do it for $300,000” or “I’m going to get an inventory loan from my wholesaler and he’s going to delay payments, maybe for three or six months.” And all that’s well and good, but we can assure you from the experience we have in this business, which is many decades long, that if you are under-capitalized and you run out of cash, you literally could grow yourself to death. As you begin to leg, up in terms of your buying from your wholesaler and with the permanent delay between the time you adjudicate claim and the time you will have to pay your bill, if you run out of cash flow, you’re dead.

Yeah, the most success we see with these start-ups, as far as financing is concerned, is when they are with a pharmacy niche bank that understands the industry and understands the cash flow needs, understands the receivables and how that works with the pharmacy. We see a lot of situations where these start-ups use a local bank, a hometown bank, and they’re underfunded because that bank doesn’t understand the pharmacy and the cashflow. And then, when they run out of money in six months and they go back to that bank, they’re not going to get any more funding from them. So it’s important to really think about that when you’re starting that process of financing, to make sure that you’re working with a pharmacy niche bank that understands truly what it’s like for a start-up in this first 18 months to two years.

And a lot of times, Bonnie, we have a hard time convincing potential pharmacy owners that the local banker they know or that local relationship they have with that bank and/or the same thing applies to other professionals, whether it’s a CPA or attorney that knows maybe nothing about pharmacy, they’re not your friends in this situation. And most banks don’t look at the cash flow opportunities that a pharmacy offers and what they want is hard collateral assets. And you typically will have to go outside and use personal assets or family assets to tie up and to get the funds that are needed. And you don’t have to do that typically with the SBA 7(a) loans that most of the pharmacy niche banks are using in a process, properly structured. And we just briefly mentioned, please use professionals that work in this industry, close these kinds of loans continuously and daily and the accounting professionals that deal in this profession on an ongoing consistent constant basis. As we tell many pharmacists, this is not rocket science what we do from an accounting and tax perspective, but it’s totally different from a regular retail arrangement. Unless you’re familiar with the aspects of it, in a start-up situation, you’d be far better off searching the web looking for those that are specialists in this particular area and use them.

What are the indications of a well-capitalized start-up?

So in those first few months of opening the store, once you have your financing in place, it’s also important to continue to protect that working capital and make sure you have as much as possible as that store is growing. Because from day one, you’re not going to just start out with a tremendous amount of sales in most cases. So that, it’s going to take some time to build that up. So you want to save as much money and have working capital available as possible. A couple of ways to do that, a lot of the pharmacy niche lenders will allow some grace periods for your payments. They may delay payments or they may also just offer interest only payments for a certain period of time, to give you time to build up your volume there at the store. Also, a lot of the wholesalers will offer some dating options that allow you that grace period of time where you can begin to order, but you may not have to start making payments until maybe six months out. So it’s just things to look at. Any of these things that offer you little to no interest for those periods of time where you can have cash available, is definitely something to look into.

And in a pharmacy situation, as far as capital is concerned, you really cannot have too much. You might think, well, I can get through this period of time maybe the first six months I’m doing okay. But as you start to grow and the pharmacy starts to prosper and as you get into maybe some other areas or maybe some clinical areas or things of that nature, or maybe some nutraceuticals, as you begin to explore where you can take this start-up, assuming that this is going to take time, to really get cash flow really moving. Cash is king in this situation. And the absolute worst thing you can, problem you can be in, is not have the cash flow in order to take care of your current accounts payable and then the term debt that you have and payments. And as Bonnie mentioned, any kind of arrangements that you can get with dating, any kind of interest only for a period of time, can assist and aid in that whole cashflow aspect and whole financing arrangement, to make sure that you got the adequate working capital. What great problem to have if you got 18 months, two years, and you just had hundreds of thousands of dollars of extra cash too much. There will certainly be many places you probably could find very quickly to place that. Whether it’s technology, and optimally, it may be if you are that successful, it may be debt pay down. But once you pay down that debt, re-borrowing that money again, I’d be very careful of. These are just the kinds of things that you need to be aware of.