Securing funding for a first-time pharmacy purchase

As a pharmacist, you are a professional providing a vital service - but you are also operating a business. Much of your income will come from real activity rather than dispensing, and you will be subject to all the usual challenges of running a commercial operation.

If you are setting up your own chemist shop for the first time, these challenges can be daunting. Finding the most cost-effective ways to provide the funds you need will be essential to your success, as the initial months will mean that income is tight while your loans have to be serviced - and even when your chemist shop has started to find its feet, any repayments that are too high will eat into your profits.

Getting the funding you need at the most affordable price has to be a priority. 

At Rangewell, we help practitioners throughout the medical and pharmaceutical professions find solutions to their funding needs - and we recently helped a newcomer to secure the funding they needed to set up their first chemists shop.

The client's challenge

Our client was a London-based pharmacist who had qualified a few years ago and was now ready to start taking the next step in his career, by acquiring his own chemist shop.

“I had been working in a large chemist chain, and I had seen how the business works. Naturally, I was confident in the pharmacy side of the business, but I knew that the real rewards of the profession only come when the professional skills can be used to support a retail business. My family are retailers and I understood the principles - and I knew that one of the most important keys to success was finding premises in the right location.”

He lived in an outer London suburb and was keen to set up his business near to his home. When a small independent chemist shop came up for sale on his local high street, he was sure that it was the opportunity that he had been waiting for. He had found his ideal business: a leasehold pharmacy close to his home that was for sale with a good location on a high street with plenty of current retail as well as a thriving scrip business.

It was small, but the premises had a large stockroom which could be converted into extra sales area. There was a regular turnover which indicated that the business was profitable as it stood and, with his own experience, he saw plenty of opportunities to expand the business.

“The shop interior was tired and the lighting and displays were dated, but there was nothing that could not be sorted out quickly. The position was the main thing, and being in a central position on the high street close to the station there was plenty of passing business. I was certain that I could make the business into a huge success - if I could raise the cash to buy it.”

The leasehold business was for sale at £700,000, and he was confident enough to make an offer of £675,000, which was accepted.

Many first time business buyers will turn to their bank to help them get the deal they want. 

Having a relationship with a high street lender should be the simplest way to secure the funding required to purchase a business, especially as banks may consider pharmacists and pharmacy purchases as being a relatively good risk and be eager to help. However, arranging funding to buy a pharmacy requires some specialist skills and knowledge of the market and the economic realities that underpin it.

In general, pharmacies are fortunate enough to have been able to continue to trade without interruption as essential services in recent times. However, changes to the way that the Government pays for dispensing medicines has caused cash flow problems for many pharmacies.  

To add further pressure to cashflow, the huge spike in prescriptions increased wholesaler bills for pharmacists at the same time as a rise in drug prices. As the NHS pays three months in arrears, the delay affected many pharmacies' ability to balance the books.

What’s more, like all retail operations, independent pharmacists are suffering from a downturn. With competition from chains and from supermarket pharmacists, getting funding for an independent chemist shop has become more challenging in recent years. 

In practice, a bank may not be able to provide the funding required - especially if your needs don’t match their strict lending criteria. This means that first-time business purchasers can find it difficult to raise the funding they need to put their business plans to work.

Our pharmacist client approached us to help secure the funds to buy the shop business, after the bank he had initially approached had failed to provide any finance offers after weeks of trying.

He provided them with the documents that they requested and had some face to face meetings. However, two months later the funding was not forthcoming, and he began to worry that he was in danger of losing the purchase if things dragged on any longer. 

The funding he needed

We saw that a straightforward loan secured on the business would not be appropriate.

Lenders can be very wary of first time business owners. Despite the pharmacist's experience, he had not run a business before. Most lenders will take the view that this is a risk - with no history of profits from a business under his control, they have no indication that his new venture would be a success, despite the fact that the business he was seeking to acquire had been trading profitably for many years.

We therefore took an alternative approach and arranged a loan as a second charge on his home. This had the disadvantage of potentially putting his residence, and that of his family, at risk but with his plans for the business looking sound, we agreed that the risk was small. 

The pharmacist had savings and family resources which would allow him to provide £100,000 deposit for the business. 

We were able to get an offer in principle for £534,000, the equivalent of 79% loan to value from a lender with a history of a positive approach to newcomers to the retail chemist sector. 

This was arranged over a period of 15 years to coincide with the lease on the property at a rate of 3.25%.

But we didn’t stop there.

“I knew that I could simply take over the existing shop complete with stock, and carry on running it as it had been. But I also knew that was not the way forward. The real profits would only come in with a refit and new stock.

Plus, you can call me cautious - but I wanted some cash in hand to use as a safety net. I knew I could make a go of the business, but it would be easier if I could count on support for our cashflow for the first few months.”

It can often be difficult to get additional funding for a new business which has already a large loan commitment, but at Rangewell we knew the solution. We could arrange revolving credit - a reserve of cash ready to be called on if required.

Revolving credit

Overdrafts used to be the most common form of everyday business funding. They were provided by the bank and would let you withdraw cash that you didn’t have in your account to use for a few days or a few weeks as a buffer against cashflow slowdowns or to deal with larger expenses. Your bank would only charge you for the cash you withdrew and for the time you used it.

But when the credit crunch hit, the banks reduced or removed overdraft facilities. Revolving Credit provides an alternative reserve of funds ready to use. 

The provider offers a line of credit with a limit agreed when you apply. It is then up to you how much of this reserve of credit you draw down. Like an overdraft, the facility will only mean a cost to you when you actually use the facility, based on the amount you draw down and the time which you hold it. You can repay at any time and the funds will be ready for use again.

This can be a useful additional source of funding if you need access to small cash sums for short periods, for purposes such as buying in stock - although, in practice, there are no restrictions on how you use the money.

If you want to fund growth or to deal with temporary cash flow shortfalls, it can provide the ideal solution.

Rates will vary between providers and will also depend on the level of funding agreed. Both secured and unsecured arrangements can be provided, with those arrangements secured on assets usually offering more attractive rates.

We arranged rolling credit with a total of £85,000 to be called on if required.

“Having the cash there if I needed it was a big help. I could bring in stock as I needed it and I could afford to start work on making the shop more attractive. Cashflow is always a worry in any business, but thanks to the rolling credit arrangement, I didn't need to worry about that either.”

The current business climate can mean that certain types of funding which may have been routine in the past are now becoming problematic.

Why you need Rangewell on your side

At Rangewell, we will work to find the type of funding that you need and which fits your business plans, but we will find alternatives if the method you want isn't available. We can frequently help find businesses answers to funding challenges, especially when going direct to lenders will not.

We can also call on the experience of our team of business finance experts to develop innovative solutions, and to put those solutions to work for your business.

With our experience of the entire lending market, it means we can find the funding you need - whatever your business challenge.