The Pharmaceutical Journal
Vol 275 No 7378 p691-692
3 December 2005

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Finance options for upgrading premises — making the right choice

Growing a pharmacy business is not something that just happens. Careful business planning is essential and additional finance may be required to make sure the business grows in the right direction at a healthy rate. Raina Jordan looks at the options

Never has the growth of a business been as important as it is today for pharmacy owners. The new contract has introduced a range of new challenges, and dispensing fees alone will not be enough to fund growth. It may be that a rethink of a business strategy is required, which could mean a complete refit of the premises or the introduction of a consultation area to make the pharmacy fit for service provision under the new contract in delivering advanced and enhanced services.

The “speculate to accumulate” cliché has never been as pertinent to pharmacy business as it is today. If investing in the business by upgrading your premises is your chosen route, then the need for additional finance is highly likely — indeed the most modest of consultation areas can start at around £5,000.

There are many different finance options available to pharmacy owners wanting to upgrade their premises. Selecting the right type of finance will help your business grow, but selecting the wrong type could prove disastrous. What appears to be a good finance deal at the outset may change over time. Your business will also be changing so it follows that your financial requirements will need to be reviewed. So it is worth keeping abreast of the different options available.

Outlined below are the main finance options pharmacy owners should look at when considering an upgrade.

Hire purchase Hire purchase is ideal for small to medium-sized businesses wanting to make investments for the long-term growth of their business. Common examples of the types of purchases made for pharmacy businesses may include consultation areas, shop refurbishment, computer equipment or a commercial vehicle. Unlike other forms of finance, such as a loan, you do not legally own the goods until the last repayment. This means that for the duration of the hire purchase agreement, the equipment (or fittings) purchased cannot be sold on without the lender’s permission and you will be liable for any damage caused to the goods within the contract period. With hire purchase, the interest rate is usually fixed, which allows the pharmacy owner to budget with confidence and capital allowances can be claimed.

Leasing Leasing is a popular option for many small businesses. It is similar to renting, in as much as you pay a fixed amount each month over a set period. Although the option of owning saves on monthly rental repayments it also leaves business vulnerable to increasing interest rates. The total cost of lease rentals can be deducted from taxable income as a trading expense. It also means that lump outgoings can be reduced from capital budget to help ease cashflow. In contrast to hire purchase, where ownership takes place after the last repayment, once the initial lease term ends, the option is offered to renew or purchase the product. Whether renewing or terminating the lease, the leaser is not left with an asset that depreciates in value.

There are companies that offer finance and leasing schemes, including the National Pharmacy Association, which can lend between £2,000 and £50,000 (amounts over £50,000 will be considered) with repayment periods ranging from one to five years.

Wholesaler loan guarantee schemes The advantage of using a wholesaler loan guarantee scheme is that wholesalers can use their financial power to negotiate competitive rates (usually between 0.75 per cent and 1.5 per cent over base rate). With these schemes, wholesalers effectively act as underwriters. Instead of lending the money themselves they facilitate the transaction between the lender and the borrower. Wholesalers have an impressive knowledge and understanding of the pharmacy market and so would be able to check your loan application for appropriateness and advise on your business plans for growth accordingly, usually free of charge. The main wholesalers (Unichem, AAH, Phoenix and Mawdsleys) offer loan guarantee schemes but the lending criteria vary between them. Generally, the minimum you are normally able to borrow is around £25,000 and repayment periods do not normally extend beyond 10 years. Bear in mind that with larger loans, the costs of the monthly repayments can often be substantial which may impact on your cashflow. Additionally, if you choose to finance through your wholesaler’s loan guarantee scheme, your business will be tied in to an ongoing trade agreement to purchase at least 70 per cent of its stock from them. This restricts the amount of choice you have when sourcing the best price for a product you want to purchase.

Loans You do not always have to hold an account with a bank or building society in order to take out a business loan so it is worth researching the finance deals available before deciding on the one that is right for the business. Each company will have different criteria when considering lending money and therefore some deals will be better suited to your financial needs than others. Depending on the size of the loan, some banks and building societies may expect some financial input but all will expect some kind of security in case the business gets into trouble. The larger lenders can often offer additional advice on how to improve cashflow. Although high street lenders will more than likely be the preferred choice when choosing loans, it is also worth considering other companies, such as supermarket banks, which can offer competitive rates. Always make sure the company is regulated by the Financial Services Authority before taking out a loan.

Overdrafts There are various advantages and disadvantages of using an overdraft facility to finance purchases. They are quick to arrange and ideal for everyday expenses to improve a shortfall in cashflow, but they are usually not a viable long-term solution given that the interest rates are often higher than loan interest rates. Overdrafts are also only available from banks where accounts are held so do not allow the borrower to search around for the best deal. Very little security is usually needed when arranging an overdraft but there is often little flexibility that comes with it — arrangement fees are often charged if credit is extended and a fee can be charged if the overdraft limit is exceeded. Unlike loans, overdrafts can be called in by the bank at any time and if repayments are not made as agreed, the bank can seize business assets against which the overdraft is secured.

Conclusion

The above is not an exhaustive list of solutions so additional research into the most appropriate finance for your business is recommended. Bear in mind that there are plenty of good deals out there, including grants in some cases, but using a company that has a good understanding of pharmacy could pay dividends.