growth in salaries, marketing and overhead
Less profit due to higher loan expenses
Potentially a decreased opportunity for full practice success
The good news is that you have control over building and maintaining your financial profile.
FIGURE 2.2: HOW CREDIT AFFECTS INTEREST RATE*
Ten Simple Steps Towards a Healthy Financial Profile
Following are 10 simple steps you can take to improve your credit rating and ensure a healthy financial profile:
1 Maintain at least two or three revolving credit accounts such as credit cards and lines of credit. This shows you are creditworthy and able to manage debt.
2 Avoid applying for credit from too many lenders. Multiple credit inquiries within a short period of time negatively impact your credit rating.
3 Demonstrate that you know how to use your credit wisely by not using all the credit available to you.
4 Make on-time monthly payments on credit cards, mortgages, installment loans and student loans. Remember, many service providers do report late payments and collections to credit bureaus.
5 Consolidate your personal loans in order to improve cash flow and generate a better financial profile.
6 If you are in dispute with a creditor, continue to make minimum monthly payments while working towards a resolution.
7 Notify creditors in writing of your address change.
8 Avoid co-signing or guarantying a loan for a friend or family member, as it has the same impact on your credit as being the primary borrower.
9 Protect your identity. Review your personal credit report at least twice a year to ensure accurate reporting of all accounts. Inform all credit bureaus in writing of any discrepancies.
10 Keep copies of all agreements, documents clearing judgments or liens, and letters from creditors clearing discrepancies in your loan history. Note that all credit information stays on your records for up to 10 years.
Begin improving your financial profile at least 12 months before starting your practice design project. With a strong financial profile, you have far greater leverage for obtaining affordable financing at the best possible rates.
Investigate the Financial Implications of Your Project
When planning a practice upgrade, many doctors find themselves weighing the pros and cons of remodeling or expanding their existing facility versus building a new office from the ground up. There are both practical and business reasons why either option might be desirable, but what are the financial considerations when trying to make this decision?
Advantages of Remodeling an Existing Practice
It should be no surprise that remodeling a current facility will likely be less costly than building from the ground up, as you are working with an existing structure. If your current space allows room to grow, you can direct a larger percentage of your funds to the décor as you are not paying to develop completely new walls, flooring, electrical services and plumbing.
In addition, with a more modest budget required for a remodel versus building from the ground up, you may find it easier to obtain project financing that fully meets your needs, particularly if you are starting a new practice and have not yet established the cash flow history upon which project funding may be based. While a remodel may not allow you to incorporate all of the features of your dream practice, you should still have adequate funding for modifying the floor plan to improve traffic flow, incorporating current equipment, expanding functional areas and enhancing office décor.
A key benefit of remodeling or expanding an existing practice versus constructing a new building is that it does not necessarily have to disrupt your patient base — patients will continue to find you at the same location where you have always been. However, you will need to carefully plan for the down time your practice may experience while under remodel. This can ultimately be a costly undertaking if your project is not properly managed and runs beyond schedule.
Investment Benefits for Ground-Up Projects
While designing and building a practice from the ground up can require a larger financing package, you can realize a significant investment advantage with this approach — particularly if you purchase the commercial real estate that underlies your practice.
A key benefit of remodeling or expanding an existing practice versus constructing a new building is that it does not necessarily have to disrupt your patient base — patients will continue to find you at the same location where you have always been.
Five Good Reasons For Building Your Dental Practice:
Here are five good reasons for building your dental practice from the ground up:
1. Favorable trends in commercial property values. Commercial property values have been rising over the past few years, but may now be stabilized or heading back downward, according to the Wall Street Journal.1 This trend can potentially give you more office space for your investment.
2. Preferential tax treatment. Just as with your home mortgage, you can deduct 100 percent of commercial mortgage interest right off the top of your business income. You can also write off depreciation expenses for the office building over a 39-year period using straight line depreciation (that is, depreciated by equal amounts each year over the property’s useful life). The mortgage deduction and building depreciation write-off reduce your taxable income, increasing your profit for the year.
3. Long-term appreciation. History has shown that real estate appreciates over time, and this will likely continue. When you own both your practice and underlying commercial real estate, you’re making two investments in one — in the value of your practice, and in the long-term appreciation of your property. Together they provide more options for generating profit and cash flow as you build your practice and approach retirement.
4. Retirement funding. When it comes time to retire, some doctors choose to sell both the practice and commercial real estate, maximizing profits and investing net cash to fund their retirement. Others sell the practice only and retain the real estate, leasing the property back to the new practice owner to generate ongoing monthly income. Whichever model you choose, with ownership of both the practice and commercial real estate you have more options for meeting your financial needs.
5. Favorable rates. While interest rates may change at any time, the Federal Reserve has continued to keep its benchmark interest rate close to zero, allowing loan rates to remain at historic lows for both commercial and residential real estate. Today it’s not uncommon for monthly payments on a 25-year commercial mortgage to be the same or lower than rental payments for a similar space. Plus, only a 10 percent down payment is required when you borrow money under the SBA loan program.
Factor Growth into Your Decision
