Editor’s note: This is the seventh and final article in a summer series of New Dentist Now blog posts on practice ownership from Wells Fargo Practice Finance, the practice lender endorsed by ADA Business Resources. To read other articles from the series, click here.
For most dental professionals, incurring significant debt while completing dental school and acquiring a practice is an inevitable part of becoming successful. The trick is to recognize the types of debt so you can effectively evaluate where you stand – and manage your debt to your best advantage. It is common to think that you are better off financially if you eliminate your debt, which is true with regards to credit cards, auto loans, student loans or other debt that does not help to generate revenue. But there is such a thing as “positive debt” – debt that is used to invest in income-producing activity.
Some types of debt can overwhelm your success
Let’s say that after purchasing your dental practice, you are paying $5,856 per month to cover both business and personal debt, including an office remodel, auto loan, student loan and home mortgage, for a total loan balance of $450,000. Now assume you want to buy a new, advanced piece of equipment priced at $125,000 and the vendor is offering financing with payments of $2,610 per month. This would bring your combined monthly payments to $8,466.
Suppose this new payment wipes out any excess funds you were planning to put towards your retirement. You would now have to consider whether to wait to purchase the new equipment so that you do not jeopardize your retirement funding, cover the additional payment with increased production, or put off saving for retirement. The new equipment loan can therefore hamper your ability to save.
To avoid this kind of debt management crisis and ensure you’re effectively managing your debt situation, work with a Certified Financial Planner (CFP) to develop a broad financial picture of long-term personal and business goals. Be sure your plan includes an assets and liabilities spreadsheet, profit and loss statement, and a plan for large annual debt expenditures.
Working with your lender to create “positive” debt
A specialized dental lender can help transform a financial liability into “positive” debt that still allows you to accumulate security and wealth. This may be accomplished through a consolidated loan that minimizes interest and total payments.
Using the example above, assume your lender offers a consolidation loan for $225,000 to cover new equipment and remodeling, and a home equity loan with a somewhat longer term to cover your auto and student loans. The new loan reduces your total monthly payment to $6,891, for a savings of $3,001 a month.
If you invest this difference monthly, you may eventually have a healthy fund for your retirement. Or, you can use this savings to reinvest in your practice, including:
- Technology investment. You might use your new-found funds to leverage the purchase of advanced technology that allows you to expand your services and make your practice more competitive.
- Enhanced marketing. Reinvesting your added cash in a well-thought-out marketing program can potentially lead to more patients and procedures for your practice. If well-planned and executed, your expanded marketing efforts should generate additional cash flow.
- Accelerated Debt Payoff. Some doctors take advantage of lower interest rates to accelerate their debt reduction program and become a debt free practice more quickly.
By managing your debt situation through the use of long-term financial planning and, if necessary, loan consolidation with a specialized dental lender, you can move a long way towards building a successful practice that meets your ultimate goals.
¹Interest rates cited are indicative only. Actual interest rates depend on your creditworthiness.