What every dentist needs to know about financing
Today’s new dentists face what can be a daunting financial challenge.
Many enter their profession saddled with debt — nearly $300,000 on average, according to the American Student Dentist Association. But that’s not all. Dentists who want to purchase their own dental practice can expect to add as much as $500,000 or more to their debt load. Meanwhile, many have little or no extra cash to purchase equipment or other upgrades, much less fund the down payment on a loan.
The good news is, a dentist’s dream of owning his or her own practice is still within reach. Achieving that dream, however, takes a more strategic approach than it may have required in generations past.
That strategy should include paying close attention to:
A practice’s cash flow
It is tempting for new dentists to focus on the outward appearance of a dental practice they’d like to purchase such as the condition of the dental equipment, furniture, computers and other assets that can be easily seen and evaluated. While those things are important, the parts of a dental practice that deserve the most scrutiny aren’t always visible, such as cash flow.
To understand that, you’ll have to examine a practice’s financial records, where you’ll learn valuable information: when and how customers pay and which procedures generate the greatest revenue, for example. Income, expenses, overhead, collection rates and other data that show how money moves in and out of the practice are critical to understand as well.
The reason is simple. Cash flow provides the funds needed to operate a practice and pay the debt associated with its purchase. The better you understand cash flow, the better you can plan for the peaks and valleys that virtually every practice experiences. You don’t think of yourself as a financial person? Make sure you have a trusted advisor who is, like your banker or accountant.
The selling dentist’s level of engagement
Not all dentists have the foresight to retire when their practice is at its peak. Many only sell after they have begun to lose patients to younger, more marketing-savvy practitioners. Some delay retirement because of financial missteps made earlier in their careers.
While you may be able to negotiate a better price for these practices, you may also be purchasing somewhat “damaged” goods. That’s why it’s important to take the pulse of the practice’s overall health, by talking to patients and staff and by reviewing financial records dating back five years or more so you can identify and assess trends.
The practice’s patient base
Learn as much as you can about patient demographics: ages, where they live, how long they’ve been treated by the current dentist. Information like this can help you get a better handle on how a move to a different location or how a marketing program to reach a different customer base might impact business and cash flow. It might also provide insights on tenant improvements to consider, as well as the number of patients you might reasonably gain or lose as you project into the future.
The practice’s procedures
Examine closely the procedures of the practice you are considering buying to make sure it is a good fit for you. As a buyer, you will want to know if you can at least match the revenue that the practice has recently generated. For example, if you like to do cosmetic procedures and expecting to enhance billings with this type of treatment, your expectations may fall short if the seller’s procedures are mainly comprised of primary care and minor restorative therapy.
Your financial advisor’s understanding of dental practice finances
Ordinarily, banks are reluctant to extend 100 percent-plus financing to professionals who are short on business experience and long on financial needs. The good news is, banks that specialize in dental practice lending, such as Commerce, understand the obstacles younger dentists face and offer invaluable solutions, such as lines of credit and flexible payment plans that provide the financial safety net many practices periodically need.
That’s why you may want to think twice about working with lenders that assign you a toll-free phone number, rather than a knowledgeable, local banker, to handle your needs. Not only are local bankers with a dental specialty better able to tailor a financing program to fit your individual circumstances, they may offer ongoing financial advice, industry contacts and other benefits that save you time and money as well.
Buying a dental practice is like to putting together a giant jigsaw puzzle. It may seem overwhelming at first, but with persistence, planning and an understanding of what the big picture should look like, you can put the pieces together. A little experienced advice along the way makes the whole process easier. Contact us if you’d like help exploring your options.