The thought of buying a dental practice can seem like a very distant goal for a lot of young dentists as the majority are saddled with significant student debt. Most new graduates desire ownership of a practice—making intelligent fiscal decisions enables this dream to be a reality. The fact is student debt increases proportionally with tuition and fees and dental practice financing will likely be needed to start up or purchase a practice.
According to the American Dental Education Association’s Survey of Dental School Seniors, the 2013 Graduating Class’s average educational debt at graduation was $215,145 (nearly 2.5 times the level in 2000) with public schools averaging $189,112 and private/private state-related $249,034. This average includes students with no debt. 89.2% of graduates have student debt and roughly 50% of graduates have debt levels between $100,000 and $300,000. 18.5% have debt levels between $300,000 and $400,000 and 9.4% have debt over $400,000.
The ADEA’s 2010 Survey of Dental Education showed tuition alone averaging $159,586 for four years of dental school – making it easily apparent why average graduating debt is stratospheric. A recent review of average new dentist salaries reveals graduates average $12,000 per month or $144,000 per year as an associate full-time dentist. However that $12,000 per month disappears when you factor in average monthly costs of living including:
- $3,500 taxes
- $1,500 rent or mortgage payment
- $500 utilities
- $1,000 car payment and auto insurance
- $1,250 life, disability, health, and malpractice insurance
Student loans add another $2,500 per month (or more) in expenses leaving just $1,750 per month for groceries, clothing, gas, health club membership, and most important: savings. This could work for a single person, but what if the young dentist is getting married? Having kids? Expenses mount. With credit cards or other non-educational debt, missing a single payment or making wrong assumptions about the grace period before beginning loan repayments can have a negative effect on the all-important determination of creditworthiness, the FICO credit score. Without a strong credit score obtaining a loan to buy a practice is highly unlikely. Some estimates state the average dentist requires over 13 years to repay his/her school debt. This conversation relates to purchasers and sellers alike.
Credit is Key
For younger doctors, good credit is the key to purchasing your first practice or perhaps buying or building your first home. Lenders look at a number of factors when making a credit decision, the most critical aspect of your financial profile is personal debt such as credit card debt, lines of credit, and student loans. Your overall credit rating is based on the amount of debt and timeliness of monthly payments. Having well-managed credit makes it easier to secure dental practice financing to purchase, build or expand a practice. Here are four simple steps that can improve your credit rating:
- Maintain at least two or three revolving credit accounts (such as credit cards and lines of credit) to demonstrate effective credit practices by not using all the credit available. Also, avoid applying for credit from too many lenders, too many credit inquiries within a short time frame negatively impact your credit rating.
- Make on-time monthly payments on credit cards, mortgages, installment loans, and student loans. Remember, most service providers such as doctors’ offices, cell phone companies, and others will report late payments and collections to credit bureaus.
- If you are in dispute with a creditor, continue making minimum monthly payments while working towards a resolution.
- Protect your identity. Review your personal credit report at least twice a year to ensure accurate reporting of all accounts. Inform all credit bureaus of any discrepancies in writing. All credit information stays on your records for up to ten years.
Expert advice for graduating dentists or associate dentists usually involves restricting expenses on big-ticket items and monitoring daily spending. Skip the expensive new car and watch how often you eat at restaurants. Limit the use of credit cards but don’t put off buying insurance because the financial consequences could be devastating. Monitor credit reports and keep an eye on your credit score while planning ahead for long-term goals. It may be common sense, but it takes constant diligence. This is the start of a lifetime of sound financial decisions enabling you to accomplish your long-term goals.
Start-up or Acquisition?
How does a recent graduate enter into the world of private practice dentistry? Start-ups are very costly with leasehold improvements averaging at least $100-$150 per sq. ft., new equipment with all digital/paperless technology in the $250,000 range, and a new 1,000 sq. ft. office easily costs $350,000 to $400,000. Despite the new walls and equipment, there is no history of new patients or cash flow. Usually, a start-up dentist is forced to have an associate job just to pay the overhead of the new office and living expenses.
The easier path is buying an existing dental practice with a historical cash flow. The negotiated purchase price is determined so the available cash flow satisfies the overhead of the practice and services the purchase debt. After debt service, there should be enough money remaining for reasonable living expenses. These procedures allow practice acquisition because lenders are willing to lend 100% of the acquisition costs of a practice plus working capital! Sellers are not generally required to cosign or guarantee the loans and are generally unwilling to do so. The best dental practice financing rates and terms are available for purchasers with the best credit ratings. Lower credit ratings can adversely affect a purchaser’s interest rate or even a purchaser’s ability to qualify for loans.
Looking for more information about dental practice financing from Henry Schein?
Henry Schein Financial Services specializes in dental practice financing solutions. We offer financing options for new dental practice startups and dental practice acquisitions.