One of the most important steps you can take to prepare for your first practice purchase or start-up is to build a productive relationship with your banker. After all, your banker or lender will likely be a significant member of your practice team, creating a financing program that fits within your budget and providing ongoing support during the practice purchase or start-up.
But don’t wait until you have identified the perfect practice situation and amount of funding you need before getting to know your lender. Start developing a relationship with your banker or lender well before your transition to ownership – even before you graduate from dental school – to help ensure an easier loan transaction and longterm support for your practice.
1) Manage Your Student Debt
Few practitioners are able to start their own business without incurring a significant amount of debt to pay for real estate, office remodels, equipment and supplies. However, paying off your student loan debt is not necessarily a prerequisite to ownership. In fact, practice ownership probably provides the best opportunity to earn enough income so that you can pay off both your student loan and practice acquisition debt over time. The key is to strategize and plan your debt payment program so that it works in your favor as you continue to build your career. For example, if your cash flow is tied up in student loan payments, you tend to lack the flexibility to manage the various business fluctuations inherent in opening a new practice, and therefore pose a greater risk to your lender. Even if your student loan is nearly paid off, your chances of qualifying for additional financing, such as an acquisition loan, are likely to be lower if you still have a high monthly student loan payment. A better strategy is to structure your student loan debt prior to ownership so that you are maximizing cash flow and minimizing debt payments.
- Look for the lowest monthly payment and the longest term available
- Do not focus on the loan rate – make minimizing the monthly payment your priority
- Use extra cash flow to build your savings before transitioning to practice ownership
- When it’s time to acquire a practice, ask your lender to consolidate your student loans
Lenders generally understand that some kinds of debt can be considered positive if it is used to invest in your future and help build more success than you would be able to generate without it. Conversely, splurging on a fancy car or big home after graduation may be considered negative debt as it pulls funds from your business. As a result, you may find it more challenging to attain a favorable acquisition or start-up loan if you have incurred significant negative debt.
2) Establish a Healthy Credit Profile
Good credit is the key to both your professional and personal financial investments, and your credit score signifies to lenders your overall creditworthiness. In fact, your credit score is critical in determining the amount of money you will be allowed to borrow and the interest rate you will be charged. While lenders consider a number of factors when making a credit decision, the most critical aspects of your financial profile are your personal debt – including student loans, credit cards and lines of credit – and your overall credit score rating. If you find your credit score has dropped below 650, use the following steps to start improving your score and build a healthy financial profile:
- Pay Your Bills on Time Prioritize and schedule your monthly payments, making sure to pay at least the minimum balance every month on all your accounts. Your payment history makes up approximately 35 percent of your credit score, so making timely payments is an important way to improve your credit score. It is a good idea to have your credit card bill scheduled to be paid on the due date through automatic monthly payments. Or you can use online bill pay to conveniently pay all your bills in the same place, at the same time.
- Keep Track of Your Credit Balances Stay on top of how much you have borrowed against your available credit and make sure to stay within your credit limit — and your budget. Keeping track of your spending will help you avoid maxing out your credit cards, exceeding your credit limit, or missing payments.
- Contribute to an Emergency Fund Set money aside every month for an emergency fund. This helps ensure that you will be able to meet your credit obligations and unexpected expenses should your circumstances change. To simplify saving for your emergency fund, consider setting up recurring transfers into a savings account through your bank.
- Avoid Maxing Out Credit Accounts Keep track of your credit transactions, especially your credit card activity. Check that you are not exceeding or maxing out your credit line, since this can reflect negatively on your credit report.
- Monitor Your Credit Reports Review your credit reports at least once a year with all three national credit bureaus. You’ll be able to catch any errors or fraud and correct them before they impact your credit history or credit score.
3) Advantages of Using a Specialized Lender Your lender should be able to offer a range of financial and supportive services for your practice acquisition or start-up, such as: • Providing funds for acquisition or start-up financing
- Providing referrals to professional vendors and suppliers
- Servicing practice financing agreements
- Developing business planning tools and resources to help manage and grow your new practice Before choosing your lender, it is helpful to understand the distinction between different types of financing companies.
- Collateral-based lenders typically Good credit is the key to both your professional and personal financial investments, and your credit score signifies to lenders your overall creditworthiness. DentalEntrepreneur.com Dental Entrepreneur Spring 2018 9 make credit decisions based on the value of your personal assets and use private possessions such as your home, money market accounts and certificates of deposit as collateral.
- Cash-flow lenders typically use the historical performance of a practice to make credit decisions and use the practice as collateral, not your personal assets. Cash-flow lenders tend to be specialized lenders focused on a particular business or industry.
Advantages of using a specialized lender
Using a specialized healthcare lender who is familiar with the needs of the dental practice can save you both time and money. Unlike most local banks, a specialized lender can likely combine your practice, equipment or property purchases into one loan package, using a streamlined process with one credit application, one set of fees and one closing. A specialized lender can usually tailor your loan package to meet your specific budget and circumstances. In addition, specialized lenders typically provide a broader range of loan options, from shortterm fixed rate loans to low variable rate mortgages. Financing will always be a critical element in building a successful dental practice. By developing a positive and constructive relationship with a lender you trust before your acquisition or start-up, you’ll likely find that the transition to ownership is not only more manageable – but also more enjoyable.