While closely related to personal goals, financial goals deserve a blog post of their own. When you are thinking about buying a dental practice, it is important to understand how your personal finances can affect your ability to get a loan and live the lifestyle you want.
Dental practices pay for themselves. This makes the conversation very different from the decision to rent or buy a home. “I can’t afford it,” does not come into play when the bank finances 100% of the sale and the income from the practice pays for the loan and your living expenses. This is why getting a handle on your living expenses is the first step.
Do you have a budget? Whether or not you’re planning to buy a dental practice, it’s always a good idea to know where your money is going and exactly how much you need to meet your goals.
These days, dental lenders are generally offering 100% financing for dental practices. This means that you don’t need large cash reserves to purchase a dental practice, so long as the cash flow is sufficient to meet your budget (and then some).
Generally, banks are looking for the monthly income from the practice to cover at least 120% – 130% of your monthly budget. This means that if you need $8,000 to cover your living expenses, saving goals, and lease and loan payments, then the monthly cash flow for the practice must be at least $10,000 for the bank to consider offering you a loan.
Remember: buying a dental practice means purchasing a business, and businesses are designed to make money. They “cash flow”. You’re borrowing money to purchase a long-term source of income. As I write on our blog about valuing dental practices, what really makes a practice valuable is the amount of money you as a buyer can expect to earn. The more expensive the practice, the more money you should expect to earn.
For this reason, there shouldn’t be any problem finding a practice that can support your lifestyle and then some.
- Cash Flow is the money that is moving (flowing) in and out of your business. Cash is flowing in from patients immediately, patients belatedly (in the form of accounts receivable), and insurance. Cash is flowing out as you pay for staff, rent, supplies, and so on. In a profitable business, more money flows in than flows out. A business is generally as valuable as the strength and size of its cash flow.
If you’re like most young dentists and you have student loans, then it is a good idea to lower your monthly loan payment if possible. In my experience, practice finance lenders are more concerned that you will be able to cover your expenses than they are that you have considerable student debt. Refinancing can offer attractive options for lowering your monthly payments.
Another obstacle that many young dentists face is building good credit. A credit score can range from 300 – 850. Generally speaking, a higher score indicates a lower risk. You are entitled to one free personal credit report each year from the three major credit reporting companies: Equifax, Experian, and TransUnion. Visit https://www.consumer.ftc.gov/articles/0155-free-credit-reports to find out more.
Increasing your credit score is possible, but it can take some time. Payment history is important – pay your bills on time! If possible, put your student loans on automatic payment, so you’re never late. If you don’t have a credit card, get one and pay it off every single month no matter what. A quick Google search for ‘how do I improve my credit score’ will offer many more suggestions. Quickly increasing your credit score is possible, but it takes discipline.
It is also important to maintain an emergency fund or liquid cash reserves of at least $5,000-10,000. In addition to protecting your budget against unforeseen expenses, banks want to see this money even when they finance 100% of the practice.
Questions to ask yourself:
- What income do I need to meet my current budget?
- What income would I like to meet my ideal budget?
- What is my credit score?
- What concrete steps can I take now to increase my credit score?