Whether you’re a newly minted dentist opening your first office or an established practitioner eyeing an expansion or renovation, you’ll want to consider whether now is the right time to finance a new venture — and how much you can afford.
To guide you through the process, it’s important to surround yourself with a group of trusted advisers, says Joseph Persichetti, senior director of Henry Schein’s Financial Services Department. He recently led a Henry Schein Dental webinar on deciding whether and how to finance your project. He outlined seven key considerations as you embark on your financing journey:
- How much can you afford and can you get pre-qualified?
Every doctor and practice is unique, but there are some key considerations that will help you decide how much you can afford to finance.
First, look at your cash flow: How much money do you have coming in from your practice and what are your expenses, including your personal debt payments, such as your mortgage and student loans? Will you be able to comfortably manage the payments? You should also map out future expenses. For example, if you recently started a practice and now plan to buy a house, will that mortgage exceed your last one? Are you planning to expand your family and how will those associated costs affect your expenses?
Next, make a business plan: This will help you assess your current situation, as well as future expenses. If you are remodeling an existing office or adding a new one, consider whether these changes will generate new revenue: Will your income ramp up more quickly than your first office?
Getting pre-qualified for a loan is important for both first-time practice owners and established dentists. All lenders are looking at the three Cs: cash flow, credit and character. These are the steps you should take:
- Find an established lender that understands health care practices and offers favorable payment terms. Can they pre-qualify you for the loan?
- Assess your working capital. If you're a first-time practice owner, look at the first couple of months of expenses, so you don't have to tap into your personal savings. If you're an established doctor, consider whether you want working capital built into a loan or line of credit.
- Get your paperwork ready. For dental startups, lenders will want a personal financial statement so they can assess your current debt, as well as assets and liquidity. Lenders will base cash flow projections on regional norms for offices similar to your own.
- Gather your tax returns. If you’re an established practice, most lenders will ask for at least two years of tax returns. If your revenues exceed $1 million or $1.5 million, in some cases, they may ask for three years of returns. Ask your certified public accountant or financial adviser to help you get ready.
- Assemble a clean and accurate profit and loss statement. Given the office shutdowns caused by COVID-19, it’s more important than ever for lenders to understand your current situation versus past performance. Lenders want to know when your offices reopened and how they’re doing post-reopening. Consult your CPA or other financial adviser for help.
- Get your credit into shape. Lenders will look at your personal credit to determine how disciplined you’ll be in paying back the loan. Make sure you review the free credit reports from the three main credit bureaus, Equifax, Experian and TransUnion, and correct any mistakes. The biggest source of inaccuracies on credit reports come from student loans. Also, don’t forget to monitor your revolving debt ratios. Having enough revolving debt to use in case of an emergency is important.
- Character matters. There’s no rule of thumb on exactly how much money you need to have in the bank to satisfy lenders. It depends on how long you have been out of school and how much savings you have managed to accumulate during that period. Have you been disciplined and shown that you've saved money for retirement or that you've put equity into your house? Did you put away money for a rainy day to get through an emergency? Student debt isn’t a deal breaker. Lenders in the space understand the necessity for financing your education. If the payment is supported by cash flow, don’t be discouraged in applying for a loan.
- How to identify the right financing solution for you
There are a lot of great lenders that deal with dental practices. But you’ll need to find the right fit for your situation. Ask these important questions in consultation with your advisers:
- Can you lock in the interest rate, and for how long? That’s extremely important right now, with rates still at all-time lows. Does that low quoted rate come with a fee? If so, what is the fee for the loan? Some lenders may offer low rates but have extremely high fees. Here’s where a financial adviser can help you crunch the numbers.
- What other requirements does that lender have? Do you need to have a banking relationship with them? It’s not uncommon for lenders to require you to open an account, but before you do, make sure you’re happy with the bank’s services: Do they have online services and mobile check deposits? Do they allow remote check deposits? How close is the nearest branch or financial center?
- If multiple terms are available, which one fits your personal situation best? Are you trying to do a 5-year loan or one that is as long as 15 years? While it might seem like a long time to carry a debt, if it gives you a low payment and you have school loans and other debt on your plate, it could be the right situation for you. After learning what terms are available, sit down with an adviser to see if the arrangement fits your goals.
- Is the rate good for the entire loan? Some loans carry a balloon payment, with the quoted rate only being good for three to five years. At that point you might have to refinance. Since interest rates are likely to rise in 2022, you might prefer a rate that's good for a longer period of time.
- What collateral is the lender requiring? Some Small Business Administration loans take a personal residence as collateral. Are you OK with that? For second offices and third offices, will they take your other office as collateral?
- What happens if your budget changes? If it goes down, can you take less, or will you need to make payments on what you originally got approved for? If lumber prices go up, for example, is there a contingency built into the construction loan or will it come out of pocket?
- Who will manage disbursements during the construction? Consider whether you have enough working capital to cover the costs to hire a project manager. If you plan to handle it yourself, make sure you have time in your busy schedule. Remember, time spent away from your practice is money.
- Is this the right time to expand your practice or open a new office?
The answer depends on many factors, from interest rates to local demographics to COVID-19-related restrictions.
- In some parts of the country, dental production has returned to pre-COVID-19 levels — or is even exceeding those levels. If you are in a city where office buildings are still closed and patients aren’t coming in for dental appointments yet, perhaps you should hold off.
- Or, you might ask for a longer term or for flexibility in your payment terms. If you are just setting up a new office or are an associate, has your income gone down? Has it bounced back to pre-COVID-19 levels yet? Do you need to start a practice now to supplement or make more income?
- One key driver of expansion has been the redesign and reduction of waiting rooms in response to local or American Dental Association mandates concerning COVID-19. Less utilization of waiting rooms could free up space for an extra operatory or new technology that could generate more revenue. And with interest rates at historic lows, this could be the time to consider expansion.
- Assessing regional stability
Look at your local market and how it’s faring. The amount of dental production varies widely between suburban, urban and rural areas around the country. Look at when you or your financial team are projecting a return to normal levels of business in your area.
- How is the future pace of scheduled recall and hygiene appointments?
- Are your revenues where you expect them to be?
- How is the regional labor market? If you need to hire more staff for your new office or expansion, will you be able to find qualified applicants that will maintain your brand’s high standards? If you don’t understand your local labor market, seek help from advisers on how to find employees before you decide or finalize your plans.
- Maximizing profits and efficiency with office redesign and technology improvements
Don’t short-cut the importance of technology in the design of your new office or expansion. Consider these factors:
- Patient experience. One of the side effects of the pandemic is that people’s expectations have shot five years into the future. They want better technology, a better experience and the ability to sit in their car and get texted when it’s time for their appointment, rather than in a waiting room.
- Cutting down on the size of your waiting room will enable you to repurpose that space to add a new operatory or other services that generate more revenue and expand your offerings.
- If you’re in an area where patient traffic still isn’t back to normal, becoming more efficient can help you save money.
- Having the right technology and solutions will help you maximize the success of your practice. Make sure as you set up your office you have the necessary technology in place to meet your patient’s expectations.
- How tax benefits and current low rates can influence your project
Have your CPA or financial adviser explore available tax benefits through Section 179 to determine the right choice for you. Here are some questions to ask:
- When should I start my project?
- How much should I finance?
- Should I put money down?
- What type of loan should I get?
- Does the availability of economic relief funds (PPP/EIDL) change the way I finance this project?
- What can I deduct? What items are not deductible?
- Identifying and building your team of experts
As a dental practitioner, you are not just the owner, but in a lot of cases, you are the biggest producer in that practice. You are the leader and the brand. So, if the experts you select to help don’t understand your business, it can take away precious time from running your practice or can impact your reputation. Often, people select family or local members of the community to help, but if they don’t do the job properly, this can hurt your practice’s profitability and efficiency.
If you don’t know the right experts, ask your financial adviser, your CPA or your Henry Schein financial services rep for help. Get a couple of referrals so that you can interview the individuals yourself.
To learn more about dental practice design, visit http://www.henryscheindigital.com/dentalpracticedesign.