Dental Practice Financing Advice for Beginners

Dental Practice Financing Advice for Beginners

In dentistry, there’s an old adage that goes like this: you can make good money off of patients, but you can make great money off of other dentists. Everyone in the field dreams of going solo or forming a partnership, but when making the leap from practicing dentist to owning a practice, there are a couple things to keep in mind:

  • Some Challenges: No one said running a business was easy, and while you may have cut your teeth on fixing teeth fast, there’s equipment maintenance, payroll, rent, and a whole lot riding on unguaranteed income. Plus, there are the skills necessary to keep a business stable and growing which you may not have acquired in dental school, like marketing, accounting and financing.
  • Big Rewards: Other than being the boss and keeping the profits, you also get the ability to choose your schedule and expand your ability to earn beyond just your own skills. And over time, just about any well-placed practice can earn you more than a salary working for someone else ever could.

Given the size of the rewards in opening your own dental practice, it’s easy to see why so many choose this path. Most of the gaps in experience mentioned in the challenges section can be learned on the job, save one – financing. Without financing, there is no practice, and no opportunity to realize the profits and freedom you want.

If you want to open a brand-new practice you need an average of $500,000.

If you buy a practice from its current owner, it’s typically valued at 65% of last year’s gross revenue.

However, with earnings potentials so great, many lenders are happy to work with independent dentists – it’s just a matter of navigating the field and making sure when you’re locked in, it’s beneficial to you in the long term.

Applying for a Loan for your Dental Practice

A business loan for your practice is really only different from a mortgage in terms of how it is assessed. While a mortgage requires you to prove current income, dental practice financing requires you to convince the lender of future income.

Here’s what you’ll need:

  • An above-average credit score
  • Two years in financial documentation: If you are buying an existing practice, you will need to provide two years of that business’ tax returns as well.
  • A business plan: Though dentists have a shared reputation for being good borrowers, a solid business plan can get you more and better loan offers from a variety of institutions.
  • Collateral & insurance: Most loans are backed up with collateral that can be collected by the lender in the event the borrower defaults on their debt. In the case of a dental practice, the owner dentist is the practice, so outside of selling some of your seized equipment and your list of patients to marketers, the lender can’t consider your practice to be collateral should you be default due to your death or a severe injury. Instead, it is common for dentists to take out significant life and disability insurance policies to back up the loan as collateral, signed out to the lender until the debt is repaid.

While the above are the bare essentials for dental practice financing, there is far more information you should have on hand to make an informed choice about a loan.

Other things to consider are whether you have other sources of income. Do you rent out a property as a landlord, do you have stocks with dividends, or do you have a side business? Any of these can help lenders feel more comfortable with a small business loan, as they signal that you will be able to pay back the debt more easily regardless of the practice’s performance.

Partnerships are also a factor – with two or more partner dentists working towards repayment, many banks feel more confident supporting such practices than solo enterprises.

Perhaps the most important point you’ll need to think about is exactly how much money do you need? This is a more complicated question than you may think – after all a loan that just covers the asking price for buying an existing practice may not be enough. You need to know what the monthly cost of operating the practice is, and plan for how many months you could survive without significant revenue.

The Costs of Running a Dental Practice

If you don’t know the number to beat, you can’t plan to break even, let alone make the kind of profits that make many open their own practices. According to surveys by Dental Economics, the average annual revenue of a solo dental practice in the U.S. is $525,000, and the average overhead after the dentist’s salary is about $350,000. Where does that kind of money go?

dental practice loans

Equipment: Those big-ticket items like your chairs, your drills, and your x-ray add up to a lot of change, and you need most of them up front which is why the loan is so important. You simply can’t perform the work without them. Updates will be few and far between, but make sure to factor this cost in even if you’re purchasing someone’s practice – the equipment could be in need of repair or replacement after many years of prior use. You need to plan for their depreciation as well when asking for a loan.

Insurance: You need insurance on the equipment and building, and against malpractice lawsuits which should be the same every month of the year.

Laboratory Charges: Most private practices don’t have their own labs and lab staff, so you should expect to send x-rays and other samples to commercial labs for analysis, and to get access for lab-created products for patients like crowns and retainers. Over the course of a year, plan for at least 7% of earnings to go toward these essential goods and services.

Marketing: From postcards and ads to patient management and recall systems, these activities are necessary to keep up the growth. You can expect to spend up to 4% of your annual budget on marketing, even when your schedule is full. You don’t want to ever let it suddenly become empty while spending in proportion to the higher earlier revenue.

Rent: Rent eats up a significant portion of your cash, especially if you picked a desirable location for your practice. The more central it is and the larger it is, the higher your costs, but discoverability and convenience are vital to good marketing and retention. You should have at least 2000 square feet to work with, and a goal of 6% of gross income for office rent.

Staff: Even a small-time practice has needs for staff – at least a dental hygienist, a dental assistant, and a front desk receptionist. An employee of this level can cost at least $40,000 a year in wages, and if you hire more dentists, you can expect some serious annual costs that need to be compensated by a consummate increase in production. Staff could cost around 20% or more of your gross billings, depending on your situation. Don’t forget their benefits, too.

Supplies: Gloves, masks, floss, fluoride, and more should be planned for on a monthly basis in accordance with expected production. If you are running your practice efficiently, you can plan on around 2% of revenue to go to supplies.

Taxes: It goes without saying, but you’ll be taxed for everything you and your employees make, so be sure to factor that into your cost plan.

The Basics of Practice Finance Math

When you’re planning out your profit-and-loss and working out the debt schedule your new practice can afford, you need some solid calculations on your side.

Start with your fixed expenses. As the name implies, they aren’t subject to change, so you know what it’s going to take. No matter what you do, these will cost one amount, and your loan will have to cover them and then some.

Upfront Fixed Costs

Take your office’s lease over the course of the first year, plus the cost of all vital equipment, and the first year’s salaries, benefits and taxes of the staff you plan to hire. Also factor in the cost of furnishing the office, or buying it from its current owner, and the first year’s marketing budget. You will need to be able to cover all of this with your loan and on-hand cash.

Variable Costs

Now take your average cost of services (for example, around $272 for composite resin on two surfaces according to the ADA in 2016), and subtract from it the averaged-out cost of supplies and lab charges. After all expenses are subtracted, subtract income tax on the revenue. Do this for each of your major services you expect to offer. Then take the average of all of them, weighted by the likely ratio of them being provided. Now you know what each visit is likely to net you in take-home profits.

With fixed costs established and the end value of doing business calculated, you can start to work out how many patients you need to beat your expenses and start turning an overall profit. With these kind of calculations, you can make a solid business plan around the kind of growth you must achieve to meet your debt schedule. Lenders will take you very seriously then.

Picking a Lender and Beginning Financing

There is no perfect way to pick a lender. You simply have to go out, submit your application to various banks and financiers, and compare offers when you get potential approvals. You don’t want to cast too wide of a net, though, as each application process can involve a credit check, and you don’t want too many of those at once so your score doesn’t get damaged.

However, there is another way to navigate the world of dental practice financing without talking to dozens of bankers and preparing your business plan all by yourself from scratch. It’s simple – get an expert to do it.

At Bellevue Capital Group, we’ve worked with many small businesses, including dentists, to get them prepared for the financing process, and then handled it all from there. We have professional relationships with over 200 lenders, so we can quickly find the highest loan amount at the lowest interest rate and the most advantageous loan structure for your specific situation. We know that dentists are unique among borrowers as they have to spend lots of time working in the business with patients, so leave working on the business to us. We take care of applications, gathering documents, and focusing your business plan, as well as finding situational advantages for you, like financing through the Small Business Administration (SBA) to obtain more working capital.

Ready to begin the process of getting financed and opening your practice? Contact Bellevue Capital Group today so you can stop dreaming and start building!