Taking the fear out of debt: Financing a dental practice after student loans
VP, Bank of America Practice Solutions
The financial landscape for new dentists can be quite scary. For example, the average dental student graduates with more than $240,000 in student loan debt – a significant increase over the last decade. This debt load can jeopardize the aspiring business owner’s motivation to purchase their first dental practice. After all, is it smart to take on additional practice loan debt?
Let’s take a different approach to looking at debt. When a person buys a business – in this case, a dental practice – the business pays the debt, not the individual. Even though almost all dental practice loans require a personal guarantee, the actual borrower of the money is the business.
Making loan payments on a new car, taking on credit card debt to pay for an expensive vacation or even purchasing a new home can be troubling when a person is saddled with high student loan debt. Why? None of these outcomes actually make the borrower money.
But borrowing money to purchase a dental practice can actually create a better cash flow position, even after adding debt. Also, 100% financing to purchase a dental practice is readily available, so there’s no need to invest current liquidity – and that protects the dentist’s personal financial statement.
Here’s an example: Let’s assume a dentist has been working as an associate for 3 years and has made an average annual salary of $150,000. The associate is now interested in buying a practice for $450,000. Historically, this practice generates revenue of $600,000. On average, a dental practice nets 40% profit to the owner.
In this scenario, the net income for the practice would be $240,000. A 10-year loan for $450,000 requires monthly payments of roughly $4,700, which amounts to $56,400 annually. After the dental practice pays the loan, the net income to the practice is $183,600 ($240,000 original net minus the $56,400 debt payments). We can see that the associate in this example will actually increase their annual income by $33,600, even though they took on an additional $450,000 in debt.
Let this way of looking at debt serve as motivation to help you fulfill your dream of owning a practice!
The current student loan situation can be overwhelming, so most new dentists will graduate with a goal to pay off all of their debt as quickly as they can, and they’ll be prudent about borrowing more money. They’ll work as associates in practices for longer periods of time than necessary because they fear acquiring additional debt.
But buying a practice could actually be a way to pay off the debt more quickly. By purchasing a business and allowing it to pay the practice debt first, a dentist can increase income and improve cash flow. Borrowing money is intimidating – and so is taking the leap from associate to practice owner – but the additional debt can actually be worth it in the end.