Do you need a pharmacy loan to start your own venture or buy an existing business?
Although it can be tough to stay profitable in an industry affected by government regulation changes every five years, for the experienced pharmacist with management experience, there is a lot of opportunity in this sector.
Discover how you can get approved for a pharmacy loan that will support you financially as you grow your business.
How does a pharmacy loan work?
Most banks and lenders have a good appetite when it comes to approving a pharmacy loan but they are very cautious when it comes to assessing the business you’re looking to run, whether it’s an existing business or a start-up.
Not all banks are the same though and for a community pharmacy in a retail location with little competition, we know lenders that will help with funding a new acquisition to improvements and fit outs of the premises.
How much can I borrow?
Australian lenders prefer pharmacies over some other types of commercial properties and are willing to offer good loans to get your business.
- Borrow up to 75% of the business value or going concern.
- Borrow up to 100% of the business value using your residential property as security or by using a guarantor.
- Maximum loan term for (freehold): 25 years.
- Maximum loan term for (leasehold): 10 years.
- Low doc loans are available.
- Principal and interest + interest only repayments available.
- Interest rate discounts vary from lender to lender and the strength of your application.
- You may be asked to provide a business plan including business forecasting.
- You need around 3 years experience as a pharmacist or in managing a pharmacist.
As an exception to standard policy, some of our lenders will allow you to borrow up to 90% of the value of your residential property to access the equity you need to complete your pharmacy purchase.
Do you qualify for a pharmacy loan?
Speak with one of our pharmacy specialists on 1300 889 743 or fill in our free assessment form to find out!
What do we do differently to the bank?
When it comes to getting a business loan to buy a pharmacy, getting a loan that’s well-priced and is set-up in a way that will support financially as you grow your business is crucial to your pharmacy success.
By going to the bank directly, you are effectively being assessed by someone who is only going to offer you their bank’s product offerings.
With a specialist mortgage broker like Home Loan Experts, we properly assess your situation and investment goals and line you up with a lender that best suits you.
We have almost 40 lenders to choose from and strong relationships with the commercial arms of a number of major Australian lenders including the big four banks.
In this way, we have the power to negotiate strong commercial interest rates on your behalf and build your case with the bank so you can borrow the amount you need to buy your dream store.
What do I need to do?
Your financial situation
Like any commercial property loan, you first need to provide basic information about your financial situation.
In most cases this will be your last two years’ personal tax returns and/or business activity statements (the latter, if applicable) and your last 3 months’ bank statements showing regular credits.
There is no hard and fast rule with pharmacy loans, because commercial finance like these don’t fall under the regulations of the NCCP Act 2009.
It all comes down to the risk of your situation and the pharmacy business you’re looking to buy.
In fact, because pharmacies are considered non-specialised commercial properties, we know lenders that offer low doc commercial loans.
This is great if you’re currently a business owner and don’t have your full financials.
Complete our free assessment form and one of our mortgage brokers will get back to you to let you know if you qualify.
Although you won’t need to have previously owned and ran a pharmacy, getting approved for a pharmacy loan usually requires to have some management experience in the industry, as a minimum 3-5 years.
Your business plan
This doesn’t necessarily have to be comprehensive.
The bank just wants to know what you plan to implement to turn a slow business around and how your previous experience supports that.
However, since getting approved for a commercial loan comes down to presenting a strong case, “wow” the lenders with profit forecasting and working capital requirements with the help of a business accountant.
This highlights your character strength as a borrower because you’ve clearly done some due diligence on how you’re going to stay viable in a competitive industry.
What will the banks look for in the business?
Do you want to set up a new pharmacy?
It can be really difficult to set up a new pharmacy in an existing suburb because you’ll be competing existing stores in the area.
In fact, most lenders won’t even consider it unless you’re planning to open a pharmacy in an expanding suburb with the right demographics and solid business plan to back it up.
The reason is that most pharmacy businesses are assessed on a capitalisation rate of 18%.
Without comparable sales, the commercial credit assessor will be unlikely to approve your pharmacy loan application except in strong cases.
What do they look for in the existing business?
As you should be doing with the help of your business accountant, the bank will be looking at the financials of the business and the personal financial the current owners and making sure everything matches up.
Banks will be wary if you or the vendor don’t provide recent financials because it might be an indication that the pharmacy is in financial trouble.
So apart from the tax returns and bank statements of the current owners, the bank will generally want the practice to meet the following when it complete its valuation:
- Earnings before interest, tax, depreciation and amortisation (EBITDA) over 8.0%.
- Gross profit margin over 25%.
- Wages plus rent over 25%.
- Strong prescription volume.
- Over-the-counter to prescription medication sales as a percentage.
- Generic substitution rates.
- 2.0x interest rate cover.
- 6.0x stock turnover.
- 1.10x working capital.
- Credit days less than 60, a useful indicator of the liquidity position of the pharmacy.
- Equity (total assets) of more than 30% of the going concern value.
Does your pharmacy stack up?
You can use the above guide to run through a valuation with a business accountant but if it doesn’t quite meet expectations, don’t worry.
These are just general requirements and differ from lender to lender.
If it’s under-performing pharmacy you’re looking to buy, it’s likely that you have a plan in place to turn things around. This is what we can help you highlight in your pharmacy loan application.
Consider the location the pharmacy and whether there are easy business opportunities to take advantage of.
A pharmacy located in a central retail location, like inside a shopping centre, with good foot traffic, strong demographics and within close distance to a medical centre or practice is a prime location and the banks will take this into consideration.
Tips for buying a pharmacy
Pharmaceutical sales have dropped over the past 2 years due to changes to government regulations but there are still opportunities in a nation characterised by an ageing population and a strong health sector.
Do your due diligence and have a plan in place to find good opportunities for growth.
What should I know about the industry?
One of the first things you should be aware in the pharmacy space is that there are only three main suppliers:
- Australian Pharmaceutical Industries Limited (API)
Because of this concentration of suppliers, no pharmacist is entitled to trade payable days above 30 days when ordering medicine, which can have a significant effect on cashflow.
This can make it difficult to operate in those first six months of operation.
In the past, pharmacists could get up to 45-60 trade payable days but Sigma almost collapsed a few years ago so the entire industry has pulled in.
This is just one of the symptoms of regulatory changes, via the Pharmaceutical Benefits Scheme (PBS), that have seen the cost of drugs slashed and therefore reduced much of the topline revenue of community pharmacies and wholesalers alike.
Every 5 years there’s a community pharmacy agreement between the government and the Pharmacy Guild of Australia and there has long been a push to increase transparency in the discount margins that pharmacies were receiving from wholesalers ever since.
This is particularly true after the Guild copped a lot of flack from the media and government for encouraging pharmacies to increase generic substitution rates.
Reducing revenue over the past 2 years is the reason why banks want to see how you plan to be successful in a new venture.
Why have pharmacies have diversified?
In the past, some pharmacies generated around 90% of their revenue from their drug dispensary business and were quite profitable.
This figure is likely more around the 40% mark and is a symptom of government changes.
Because the profitability of a pharmacy has been engineered to be decreasing, business owners basically need to have front-of-shop offerings like beauty, hair care and supplement products to be able to supplement their income.
How can I run a viable business?
Although there are no hard and fast rules, you should consider implementing more Pharmacy Incentive Schemes (PIS) into your pharmacy to take advantage of government subsidies.
One PIS is the Methadone/Buprenorphine Program which is designed to help methadone addicts get clean.
This is one way you can differentiate yourself from the competition along with specialty items that other pharmacists may not be able to offer.
Pharmacy loan FAQs
What equipment do I need for a pharmacy?
Some equipment that you might consider leasing include:
- Heavy duty scales.
- Dispensing measures.
- Mortars and pestles.
- A counting tray for pills and tablets.
- Refrigerators and incubators.
- Bathroom aids.
- Walking aids.
- Seating for customers.
Our mortgage brokers are pharmacy loan specialists and can put you in touch with a lender that can help you with asset financing.
Another thing to bear in mind is that under the Pharmacy Guild guidelines, you’ll be required to refurbish your store every 3 years.
We can refinance your pharmacy loan to fund the fit out!
Call us on 1300 889 743 or complete our free assessment form to find out how we can help you with finance.
Are there any laws I need to be aware of?
Some of this legislation includes:
- Health Practitioner Regulation National Law & Regulations
- Public Health Act
- Therapeutic Goods Act
- Health Care Complaints Act
- Retail Leases Act
Remember: You aren’t permitted to supply pharmaceutical benefits under the National Health, Pensioner Medical or Veterans Affairs Services unless you are registered and have an approval number.
How do I access Pharmacy Practice Incentives (PPS)?
The PBS will pay incentives under the 5th Community Pharmacy Agreement provided that the pharmacy is accredited under the Quality Care Pharmacy Program (QCPP).
After buying the pharmacy, you must provide your PBS number and bank account details when applying for PPS.
Should I get financial advice before purchasing?
It’s always recommended that you seek out independent financial and legal advice before buying a pharmacy.
Initial consultations are sometimes free for accountants, financial advisors and lawyers but even if you have to pay a few thousand for these professionals, you have a much better chance at avoiding really common mistakes that can quickly put you out of business.
A business broker or commercial buyers agent who has experience in buying and selling pharmacies can help you find great investment opportunities but you’ll need more professionals in your team.
A specialist accountant, for example, can also help you save a lot of money over the long term by helping you set up an entity structure that is more profitable for your situation.
Need help negotiating the terms of the contract of sale? A solicitor can help.
If you make an agreement with the vendor that all of the pharmacies equipment is in working order before you sign the contract, you’ll want to make sure that there is a null-and-void arrangement in the Heads of Agreement just in case they fail to repair or undertake replacement work.
Do you need a pharmacy loan to get your business dreams off the ground?
Stop dreaming and speak with one of our pharmacy loan specialists today on 1300 889 743 or by completing our online assessment form.