Last weekend’s edition had several articles about the big banks and small business owners, some of whom have a recurring need for Medical Equipment Finance. The small businesses interviewed did not include any Medical Practitioners, but as mentioned in a previous post, the banks’ credit managers still refuse to recognise the much lower risk profile of the Healthcare Industry, preferring instead to apply rigid, one-size-fits-all finance approval criteria.
The general tone of the articles was that the banks heavily favour big business and residential property business at the expense of small business. The expense was quantified in relation to bank bills swap rates – big business pays a premium of about 2%, whereas small business pays close to 4%. This closely correlates with my own experience and provides a pretty good guide about rates in general.
For example, 90-day bank bills were quoted at 4.82% last Friday, so small business can expect to pay in the high 8s, and big business will get rates in the high 6s. That, of course, assumes that credit is forthcoming, and many small businesses are getting squeezed by tougher credit criteria that ignores longstanding relationships and good credit histories.
One SME owner made reference to his bank’s moving the goal posts on lending covenants and said, “When the sun’s shining the banks give you an umbrella but when it’s raining they want it back again.” Another said, “They will only give you money if you give them something of greater or equal value.” An embarrassed banker had to say to one client, ‘Come back when you don’t need the money.’ The comparison of the banks’ current actions with that of pawn shops seems valid to me.
Medical Equipment Finance is now even tougher to sell, because Radiologists have experienced a recent sharp decline in their CT workload, which means less revenue. This is because the HIC has succeeded in a campaign to reduce CT referrals by GPs.
There may be a few GPs who abuse the system with inappropriate referrals, and it’s fair enough that they should ‘be told’. But, the HIC shotgun approach could have unwelcome consequences if a patient who should have been referred wasn’t, and the opportunity for an early diagnosis of a life-threatening disease was missed. If CT referrals have dropped by as much as 20%, there’s bound to be patients at risk, so the shotgun could backfire on the HIC.
The Australian economy remains relatively strong, but the trend remains up for interest rates for Medical Equipment Finance. The Good News is that the OECD predicts that Australian GDP will grow by 3.2% this year and 3.6% in 2011. That compares well against the projected OECD averages of 2.7% and 2.8%, respectively.
However, they also predict that the RBA will raise the cash rate to 5.7% by June of next year. The 1.2% increase will likely mean standard variable mortgage rates of 8.6%. That makes the current five-year fixed rates in the mid-sevens fairly attractive, unless your broker can provide you a beefy discount to the standard variable rate.
Primary Healthcare’s strategy is unclear, but it appears that they’ve approached just about every independent Diagnostic Imaging practice/group in Sydney with offers to buy their businesses. By my count, five have accepted so far, which means that my market has shrunk accordingly, because Primary and the other corporates either fund their Medical Imaging Equipment from cash flow or with finance from longstanding relationships with one of the big banks.
Having purchased Symbion a while back, Primary has lost so many Radiologists that they now appear to be having trouble covering a declining workload. So, the main objective of the current round of acquisitions could be to secure long-term (3-5 years) contracts with additional Radiologists and Nuclear Medicine Physicians. There’s also speculation that Primary may be ‘bulking up’ with the intent of spinning off their Medical Imaging division in a public float.
The Medical Imaging Market went through a major consolidation phase starting in the late 90s and has since diversified with new independents steadily setting up shop. This new round of consolidation won’t last very long, giving way to new independent competition, which means that my market will grow again.