April 29, 2022 | Last Updated on: July 20, 2023
A Pharmacy is not just a business with a large potential for profit and success. Pharmacies are also vital components of communities in terms of contributing to the health and well-being of customers. As a result, pharmacies have huge revenue potential. However, this doesn’t come without a significant capital need, both for set-up and day-to-day operations. There is always opportunity for expansion which of course needs to be fueled with funds, hence, in this article, we will explore the following:
For a business to grow and expand, it is important for such a business to always tap into opportunities for growth and expansion among other things, this also holds true for pharmacies and independent pharmacists. For growth to happen, funding is a factor, hence, the need for us to explore funding options like loans. There are evident opportunities for growth in the healthcare industry with solid statistical backings:
Much more than the opportunities offered by the increase in demand in the healthcare industry; advances in medical research, increase in the aging population, and continuation of specialized medical treatments also offer opportunities for growth for pharmacies.
Pharmacies are quite profitable when compared to other business ventures in the healthcare industry, however, they are much more costly to start and run. To start a pharmacy, you’ll need between $880,000 and $1,800,000 a year, and the average monthly operating expenses for a pharmacy total around $30,000. Hence, the need to talk about the things pharmacies will need a loan for, how to get those loans as well as the different loan options available.
There are always opportunities for expansion in business which also holds true for pharmacies. There are different services that pharmacies can delve into which will bring in more revenue and of course will not function without the appropriate volume of funding. Here are some of the new services being administered by independent pharmacists:
Inventory purchase and expansion are by far one of the most important, if not the most important cost a pharmacist will incur in running a pharmacy and it can take over 60% of the total expense. According to the 2018 NCPA Digest, the average cost of goods for an independent pharmacy is a whopping $230,690 every month. Pharmacies can make use of SBA loans and working capital finance for inventory.
The next important thing after inventory is rent. Every pharmacy needs a commercial space to conduct its business activities. Rent will take up a significant part of the total expenses pharmacists incur. Typically, a commercial space could cost between $15 and $20 per square foot. For a pharmacy that is about 800 square feet, you may end up with over $16,000 in monthly payments. Rent for pharmacies can be financed with term loans, SBA loans, or even a business line of credit.
Like every other business, pharmacies also have employees, ranging from specialists to administrators. According to the Bureau of Labor Statistics, an average pharmacist earns about $124,170 per annum and a pharmacy technician on the other hand earns about $13 per hour, the total cost you incur on this front is dependent on the number of staff needed. Pharmacies can consider taking out a working capital loan to finance employees’ wages when needed.
There is a need for operational efficiency like keeping the lights on, keeping the water running, and keeping the building connected among other utilities. These are basic things a business should not lack and can be easily financed through SBA loans, short term loans, and working capital loans among others.
What keeps any business going is revenue which does not come at its best without marketing, hence, marketing is an essential part of running a pharmacy, just like any other business. In 2019, the average revenue for independent pharmacies was $3,400,000. As it is often recommended for businesses to spend up to 5% of their revenue on marketing, pharmacies may have to spend up to $170,000 on marketing per annum. Marketing for pharmacies can be slightly different from how general marketing works, in that, in some cases, marketing to consumers directly alone may not be effective enough to yield revenue, pharmacies should also consider marketing to hospitals and other players in the healthcare industry that make up the supply chain. Here, we are talking about B2B (Business to Business) and B2C (Business to Consumer) marketing, both of which have different approaches. Pharmacies can decide to take on marketing activities internally or outsource to a marketing agency. As of 2020, business owners spent a minimum of $4000 a month to hire a marketing agency.
SBA loans are offered to businesses that need financing for different expenses associated with their business, from operating expenses to commercial real estate. This loan can be beneficial for pharmacies in terms of working capital, equipment financing, and real estate purchases among other business needs. You can expect between $5000 and $5 million loan amount for SBA loans. How does an SBA loan work? The U.S. Small Business Administration partners with banks and other lending institutions to provide credit facilities to businesses that will otherwise not have been eligible for a loan. The lenders will offer loans to the borrowers at a lower interest rate than normal due to SBA involvement. Borrowers, in this case, are typically banks, though other lending institutions can come into play.
Pharmacies can make use of term loans to fund major expenses such as inventory purchases and rent on a long-term or short-term basis. Long-term loans can be used for major purchases like buildings and renovations and have different repayment options. They usually have loan terms of up to 10 years and have fixed rates. Short-term loans on the other hand are used to cover smaller and immediate expenses with a repayment period of up to 18 months. Although long-term loans have a lower interest rate when compared to short-term loans, the underwriting and due diligence attached to the loan approval is more involved.
Whereas a loan provides a lump sum of cash all at once, a business line of credit lets you access up to a threshold amount that you can borrow up to, repay, and borrow again. It’s ideal if you need some capital now and the rest later.
A working capital loan is a loan that is taken to finance a company’s everyday operations. A working capital loan is a business loan to cover normal operating expenses especially when there is a shortfall in revenues versus expenses. Pharmacies can consider a working capital loan in the following situation: seasonal revenue fluctuation, unforeseen expenses, business growth, buying inventory, inconsistent cash flow, and equipment purchase.
Although a traditional bank loan is not as favorable as Small Business Administration (SBA) loan, banks find pharmacies attractive due to their high success rate, hence, there are specialized programs for pharmacies as well as a favorable interest rate. You can expect loan amounts between $30,000 and $5 million with a repayment term of up to 10 years.
Inventory financing comes in the form of a short-term loan or line of credit and is specifically designed to cover inventory costs. Inventory typically acts as collateral on the loan or line of credit and the lender would finance up to 80% of the inventory value. Inventory financing may come with high-interest rates and terms are usually short, requiring daily or weekly repayments.
Note:
It is important to know that every lender wants to know about the creditworthiness of a borrower because the repayment of loans is what keeps them in business. They check the eligibility of a potential borrower by performing a credit check to access their ability to repay the loan.
The high success rate of pharmacies and drug stores makes loans for pharmacists an attractive proposition for banks; they generally will offer favorable interest rates for financing a pharmacy practice.
Many financial institutions are willing to provide term loans to health professionals because their services are always in demand. This is especially the case now as the world continues to fight the COVID-19 pandemic. However, because you’ll be borrowing a substantial amount of capital, you’ll need a strong credit history and a solid business plan.
You’ll want to come in with a strong personal and business credit history and credit score to improve your chances for approval and a lower interest rate.
