Gordon F., Jr., How to Open a New Dental Office or Relocate Your Current One: A Journey Through the Dark Side of Dentistry. Phoenix: GFO Publishing, 2011.
This chapter is a brief summary of a topic covered in Gordon’s new book, How to Open a New Dental Office or Relocate Your Current One: A Journey Through the Dark Side of Dentistry. A more in-depth analysis of this topic, as well as a comprehensive overview of the entire process of new dental office development, can be found in his book.
Chapter 2:
Financial Planning
Chapter 2:
Financial Planning
By Wells Fargo Practice Finance
LEARNING OBJECTIVES
Manage your financial profile to help qualify for preferred loan amounts, rates and terms
Understand the financial implications of a practice construction, expansion or remodel project and how to calculate whether your practice can absorb your project costs
Compare financing options and understand the differences between conventional practice financing, Small Business Administration loans, and specialty lender financing
Differentiate types of lenders and the approaches they use to make credit decisions
Identify the tax programs that can help maximize your project investment
Perhaps the most exciting aspect of designing your dental practice is watching your vision come to fruition, with the exact ambience, equipment and technology you prefer. But getting there requires the disciplined work of financial planning — the careful investigation of all financial aspects of your project in order to produce a realistic design plan and budget. Sound dull? It’s not! Because a careful financial planning process is the beginning of making your dream practice a reality. As you put your financial plan together, the question of whether you can afford this kind of project is definitively answered. You learn about the financial implications of a remodel versus rebuild, the types of loans that are available, how to calculate the amount of debt your practice can manage, and much more. And it all starts long before your project manifests a single blueprint — with a strong financial profile that positions you for maximum leverage with your lender.
NOTE: All financing is subject to credit approval, and if applicable, determination of SBA eligibility.
Manage Your Financial Profile
Ask yourself: “How strong is your financial profile? What does your credit history tell a lender?”
Good credit is the key to both your professional and personal financial investments, and your credit score signifies to lenders your overall creditworthiness. In fact, your credit score is critical in determining the amount of money you will be allowed to borrow and the interest rate you will be charged. While lenders consider a number of factors when making a credit decision, the most critical aspects of your financial profile are your personal debt — including student loans, credit cards and lines of credit — and your overall credit score rating.
Good credit is the key to both your professional and personal financial investments, and your credit score signifies to lenders your overall creditworthiness.
Factors Used in Calculating Credit Scores
Your credit score is a numeric expression of the information contained in credit reports generated by three major credit bureaus — Equifax, Experian, and TransUnion. These credit reports summarize your credit history including the types and amount of debt you have held in the past and your timeliness in making payments. Certain credit events can have a highly negative impact on your credit reports, including charge-offs, debt collections, bankruptcy, foreclosure, tax liens, and judgments.
The credit score itself is assigned by an independent rating company, with the most widely used scoring systems provided by FICO (Fair Isaac Corporation) and VantageScore 3.0. Credit score rating is not a precise art, as each rating company develops its own score range and lenders have their own definitions of what comprises a good or poor credit score. FICO and VantageScore 3.0 each use a score range from 300 to 850, with higher numbers indicating the borrower is a more favorable credit risk, and lower numbers indicating the borrower is a less favorable credit risk.
Credit scores from FICO for the general population are typically comprised of the following mix of personal information:
FIGURE 2.1: HOW CREDIT SCORES ARE CALCULATED
Source: www.myfico.com/crediteducation/whatsinyourscore.aspx
Five Actions That Can Ruin Your Credit Score
While occasionally being a day late on a bill payment may not ruin your credit score, there are five specific credit actions that can definitely lower your credit rating. In some cases, dramatically. Do everything in your power to avoid these credit situations:
Maximized credit card. A credit card that is “maxed out” — charged up to, or close to, the limit of the credit line assigned to the card — indicates to lenders that you are not in control of your debt.
30-day late payment. While a payment that is a day or two late may be overlooked, a 30-day late payment is a red flag to lenders indicating you may be having difficulty repaying your loans.
Debt settlement. Settling debt with a creditor is better than simply not repaying the loan, but still has a negative impact on your credit score.
Foreclosure. Foreclosure on a personal or business mortgage will have a significant negative impact on your credit score.
Bankruptcy. Bankruptcy is the worst case scenario and will significantly downgrade your credit rating for many years.
Clearly, mismanagement of your debt can result in a poor credit score and, consequently, result in serious damage to your overall financial profile. Based on the formula for granting loans, credit mismanagement is likely to lower the amount of credit available to you and require a higher interest rate on loan payments. This can significantly impact the amount you pay over the life of your loan, as shown in figure 2.2.
Ultimately, a poor financial profile can impact your ability to build a solid foundation for dental practice success, including:
Less money to design your practice according to your vision
Restrained ability to develop a competitive operation
Fewer
