Preparing for first-time ownership

March 1, 2008
Allison Farey, President of Matsco, has more than 25 years of experience in the equipment leasing and financial services industry.

by Allison Farey

Allison Farey, President of Matsco, has more than 25 years of experience in the equipment leasing and financial services industry. For more information about Matsco’s practice financing and Practice SuccessTM Program, call (800) 326-0376 or visit

Taking the plunge into practice ownership can be exhilarating — and terrifying. Your dental school training no doubt prepared you for virtually every clinical scenario, but not for establishing a practice. Of course, your experience as an associate has probably allowed you to pick up some ideas about the kind of practice you want (or don’t want), as well as some business savvy.

But if you’re like most, it’s unlikely that your experience has closed all your knowledge gaps: How do you secure financing that supports your practice goals? How do you manage all those legal, accounting, and insurance issues? What about the myriad concerns of practice construction or acquisition?

In other words, how do you prepare yourself now for a confident and successful leap to ownership?

Having worked with many dental professionals starting a first practice, I’ve noticed the ones who are the most successful are generally those who do a great deal of planning and preparation. Some of this planning can take place while you’re still in dental school.

Step 1 — Maintain your good credit rating

It is never too early to start building your credit rating. In fact, dental school is a great time to start thinking about it. Derogatory information stays on your credit report for seven to 10 years, so what you do today can affect your ability to secure a business loan several years from now.

In fact, your personal credit rating is the best indicator to a lender that you have managed your obligations responsibly. And if you are an associate with no business assets or a new graduate, a clean credit rating is the only way you have to demonstrate your financial responsibility.

Lenders rely heavily on the character of borrowers, and a good credit rating is the best indicator that you’re a good risk. So even if you’re not quite ready to start your own practice, you should review your credit history right now and, if necessary, clean it up.

The following general guidelines can help you maintain the type of credit history that lenders will favor:

Make on-time payments

If you’re having difficulties making loan payments on mortgage, student, revolving credit or installment loans, make the minimum payment rather than a late payment.

Payment activity is reported to the credit bureau monthly. When a payment is 30 days or more overdue, that fact is added to your credit history.

Avoid co-signing on loans

You may be surprised at how easy it is for other people to adversely affect your credit rating, even though you pay your own bills promptly. For instance, a medical student who co-signs with friends to rent an apartment can receive a negative report on his credit history when his friends fail to pay their share of the rent. From the lender’s viewpoint, the fact that the student paid his portion is irrelevant if the full rent isn’t paid on time.

Avoid tax liens

When a taxpayer is behind on payments, the IRS files a lien, which goes on your credit report. Most lenders will not approve loans for borrowers with tax liens on their records.

Reduce credit activity

When applying for a business loan, avoid submitting multiple applications for that loan or applying for additional loans during the approval process. A lender who sees that your credit report has been pulled by six different lenders during a two-month time period may see you as a higher credit risk and may be less likely to approve your loan.

Step 2 — Develop a plan

If your credit is already spotless and you are ready to secure financing, your next step is to show a potential lender that you have a realistic, well-reasoned plan for making your practice a success so you can repay your debt.

Be prepared to present potential lenders with a practice vision, business plan, and project plan. As we discussed in previous articles, your practice vision should paint a compelling picture of your practice while your business plan offers a road map to get there. Your business plan is not only an excellent way to show lenders you understand that your practice must be run like any other business, but a management tool to help you track, monitor, and evaluate your progress.

Also, your business plan should include cash flow projections for the first few years of business so your lender can see that you have a plan for repaying your loan.

Your project plan should describe how you plan to spend the proceeds of your loan. As you develop your project plan, avoid the temptation to build an ambitious first practice. Dental practices have come a long way from the austere set-ups of the past and it’s easy to develop grandiose plans for lavish offices and expensive equipment.

Your dream office may be great conceptually, but as a new practitioner you’ll have difficulties generating enough cash flow to service the debt required for such a project. Save your dental “Taj Majal” for later in your career. Of course, if you are purchasing an existing practice, you will want to show that you’ve done due diligence.

Step 3 — Build a core team of advisors

The doctors I know who succeed with their first practice surround themselves with a team of experts who live and breathe the dental industry. Your team should include an accountant, attorney, lender, insurance broker, and general contractor. You may also want to include a local practitioner/mentor and perhaps a practice management consultant.

It’s essential that these specialists have experience working with dental practice acquisitions or start-ups, whichever you’re undertaking. Why is this so important? Let’s say you have just four years of experience working in a practice. A team of industry experts can add a total of 10, 20, or even 100 additional years of dental industry experience to your four, in addition to expertise in their field!

I know it’s tempting to cut corners by asking Uncle Charlie the accountant for financial advice, but don’t do it!

Step 4 — Approach lenders with confidence

Many young doctors feel intimidated when approaching lenders for their first practice loan. After all, why would any lender want to invest $50K, $100K, or even $300K in a young doctor with nothing but a new diploma and just a few years of practice experience?

You would be surprised. If you have good personal credit, some experience as an associate, and have a strong practice vision and business plan, you’re an excellent risk for many types of lenders. In fact, you can even afford to be selective in choosing your lender.

So as you consider financing options, think about the practice start-up process and how you want to be supported through it. Would you like a flexible repayment structure to enhance your cash flow? Ask if it’s available. What markets does the lender serve? Do they have experience with doctors who are opening their first dental practice?

If not, don’t expect to get much business support. How does the loan approval process work? Who will fund your loan and who will service it? If your funder won’t actually service the loan, then you need to know up front. Whom can you call if you have questions or need help?

Your assets are also a consideration when choosing a lender. If you have a down payment or relatives willing to lend it to you, you can look at a broader range of lenders. Banks require at least 20 percent of the total project cost or practice purchase price. If you’re borrowing $300K, you will have to put $60K of your own money into the practice. If you don’t have that kind of cash, don’t panic.

Remember that your diploma, work experience in dentistry, and good credit are your most valuable assets. Specialty finance companies, which generally provide up to 100 percent financing, are probably a more appropriate choice for you.

Like preparing a tooth for a filling or crown, there’s no “one size fits all” blueprint for success. In fact, each practitioner’s journey is as unique as the individual. That’s why it’s essential that you tap into the experience of people who understand you and your goals and can guide you along the way.

Like preparing a tooth for a filling or crown, there’s no “one size fits all” blueprint for success.

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