option you choose, be sure to factor growth into your office design. Over the years, your patient base, office functions and dental technology will evolve and grow. Plan to accommodate this long-term growth with a design plan and budget that factor in additional staff and equipment — even an additional operatory or two — that your practice can grow into. Remember that you will make payments on your financing package for 10 or more years, and building growth into your design will help maximize your investment.
To help determine how much growth to build into your project, conduct market research on projected growth for your area over the next decade. Look at summaries of the most recent census data as well as professionally compiled market data reports. Some market data reports are available online, or even through your practice lender.
Can I Afford a Practice Expansion or Remodel?
The best way to determine whether your project is affordable is to develop a cost projection covering all purchases and improvements and broken down into monthly payments. An initial cost projection is designed to give you a general idea of where your funds will be spent, whether you can truly afford your project as planned, and where you might make modifications to your plan to make it more realistic for your budget if necessary. Once you have a cost projection that is feasible for your budget, you can finalize your design plans.
Figure 2.3 is a simplified cost projection for building a four-operatory, 2,000 square foot expansion. (Your project may be larger or smaller, and actual costs will vary accordingly.)
FIGURE 2.3: SAMPLE COST PROJECTION — PRACTICE EXPANSION (LEASEHOLD)
An initial cost projection is designed to give you a general idea of where your funds will be spent, whether you can truly afford your project as planned, and where you might make modifications to your plan to make it more realistic for your budget if necessary.
To be of maximum value to you and your lender, eventually you will need to generate a more detailed projection that includes project estimates from your architect, designer and contractor, as well as equipment costs, supply allowance, working capital, moving expenses, signage costs, telephone and computer expenses, and furnishings. Have your accountant review all costs before submitting your projections to your lender for a final loan commitment.
Now that you have an idea of what your project will cost per month, how do you determine whether your practice can absorb this amount of debt? For this you need to generate a debt service calculation, outlined in Figure 2.4:
FIGURE 2.4: SAMPLE DEBT SERVICE CALCULATION
If your debt service ratio is 1.25:1.00 or higher, your practice should be able to generate adequate cash flow to cover your new practice debt. However, be sure to speak with your financial advisor to determine whether your particular circumstances allow you to safely take on the amount of debt your project would require.
Understand Your Financing Options
Before approaching your lender for project financing, understand your financing options so you can make an informed decision about the type of package that will work best for you.
Loan options are based on the type of project you pursue. When it comes to dental practices, whether you are purchasing, starting, expanding or remodeling a practice, your loan is considered “practice financing” and can be structured as either a conventional practice loan, or a Small Business Administration (SBA) loan.
Conventional Financing
Most conventional practice loans are financed over five to 10 years. They can range from variable and fixed-rate loan packages with down payment requirements up to 30 percent and standard repayment terms, to personalized fixed-rate loans with up to 100 percent financing and flexible terms. Flexibility in the repayment schedule allows you to start with lower payments as you are getting your practice off the ground, and increase the size of payments as your business grows.
Small Business Administration (SBA) Loans
SBA loans are guaranteed in part by the government and designed to help new businesses get started. Their many benefits include a lower down payment (as low as 10 percent), longer repayment terms (20-25 years), and competitive fixed and variable rates. The key to an expedited loan process is to work with a Preferred SBA Lender who has been given the authority to make loan decisions on behalf of the government and can move you through the loan process quickly and efficiently.
Specialty Lender Financing
Specialty lender financing consists of a conventional or SBA loan customized by a specialty healthcare lender to meet your particular situation and needs. Using a specialty healthcare lender for your project can save you both time and money. Unlike most local banks, a specialty lender can combine your practice, equipment or property purchases into one loan package, providing a streamlined process with one credit application, one set of fees and one closing. In addition, specialty lenders can provide a broader range of loan options, from short-term fixed rate loans to low variable rate mortgages. They may also offer planning and business tracking resources to help make the remodel, expansion, or build-out process run more smoothly.
Loan specifics may include:
Up to 100 percent financing with flexible repayment plans
10-year amortization
Low closing costs
Financing based primarily on historical or projected practice income rather than personal assets
The chart on the next page compares the differences between conventional financing, SBA loans, and specialty lender financing. Before committing to a loan package, carefully review and compare the different financing options with your lender to fully understand the pros and cons of each and how they might affect your particular circumstances. It may also be prudent to discuss the loan package with your financial advisor.
FIGURE 2.5: COMPARING FINANCING OPTIONS (LEASED SPACE)
Before approaching your lender for project financing, understand your financing options so you can make an informed decision about the type of package that will work best for you.
Select a Lender Who Can Meet Your Needs
Dentists have unique financing needs. Practice construction costs vary depending on where you are located, but can average $150 to $250 per square foot for building operatories, office space and reception areas. Additional funding is required for advanced dental equipment, computer systems integration and décor.
Look for a lender with dental industry experience who is familiar with the construction process and special requirements of dental practices:
• Is the lender able to provide cash flow funding to support business operations during and after construction?
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