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Does Good Debt Exist in the Dental Practice?

The following is a guest post by Ken Runkle, America’s Profitability Expert™ of Paragon Management, Inc.. If you are interested in guest posting for Dental Heroes, please sign up here.

We know debt can be destructive. Can it also be good? Ken Runkle evaluates five forms of dental practice debt, revealing whether it is good debt or bad debt. Understanding practice debt and using it wisely will help you protect your practice while enabling you to achieve your personal and practice goals.

Daily we are sinking into a crater of national debt, many are drowning with significant credit card debt and other consumer debt, and we have a housing market being swallowed by bad debt.

Is it possible that there are also good forms of debt?

Early in my consulting career, I aggressively pursued educational opportunities and mentors to help me fully understand the economics of dentistry. Learning what causes growth, how debt works, and how to measure risk and reward has become a lifelong challenge after more than two decades of helping dental practices thrive.

Experience has shown me that there are good forms of debt in a dental practice. The reality is that most doctors will have to go into debt at some point in their career. Whether it is starting a practice, purchasing a practice, or investing in buildings or new equipment; debt will be on the ledger. Understanding the differences between good debt and bad debt can have a massive impact on your practice both today and in the future.

I would like you to consider the five forms of debt below as they relate to your practice. Please understand that the information represents a general overview and that each circumstance and situation may present special considerations that impact whether or not it is good or bad debt.

1. Practice Purchase

Score: Good Debt with considerations
In more than two decades of tracking dental practice profit and loss statements, I have come to believe that a practice purchase is the number one way to increase your practice. Yes, it will probably put you into debt. However, debt from a practice purchase represents good debt as long as your purchase price is reasonable. One major benefit of a practice purchase is that the payoff begins on day one with an established cash flow, making it wiser to buy an existing practice than to start a new practice.

As a note of caution, if you choose not to purchase a practice in your area that is for sale, chances are good that another dentist will. It makes more sense for you to own that market share than to cede it to another. Yes, there is absolutely enough dentistry out there for everyone to succeed, but practice purchase opportunities in your area may be limited. Take advantage of them or someone else will.

NOTE: One variable that impacts whether or not a practice purchase represents “good debt” is the length of time you plan to continue to practice. Debt from a practice purchase may not be good debt if you do not plan to practice for less than seven more years.

2. Line of Credit for Working Capital

Score: Good Debt, but could become bad debt
Working capital for a new practice or a practice purchase represents a necessity and a good form of debt. However, it does have a timeline attached to its value. After five years, a line of credit moves from good debt to bad debt in the eyes of a banker. Leaving open a line of credit after five years will almost always drop your credit score, making money more expensive for future opportunities. Banks view a working capital line of credit as a short-term arrangement. Within five years, if you have developed a solid plan to put aside profits and surplus, your practice should be your bank.

3. Equipment Purchase & Leasehold Improvements

Score: Good Debt with considerations
When making a practice purchase, it is essential that you consider all potential needs. Often in a practice purchase, updating or replacing equipment and leasehold improvements may not be fully calculated in the offer or in the overall financial consideration. Depending upon the age of the practice and the previous owner’s approach to stay modern, you may have to re-equip the entire practice from dental chairs, to instruments, to expensive modern dental equipment, to a complete redesign of the space. However, on the whole, equipment purchases represent an investment in the growth and future of your practice and generally qualify as good debt.

4. Building Purchase

Score: Good Debt with considerations
Although many in the dental industry may disagree on the value of a building purchase, my experience has been that a building purchase represents both good debt and a good investment. For example, if you plan to practice for another thirty years, purchasing a building makes sense. At the end of thirty years, you can either have equity in real property if you chose to purchase the building or a shoebox full of receipts if you chose a rental or lease agreement. Even if you sell the building for half of it’s value, you have turned what would have been lease payments into equity.

Another potential benefit of building ownership arises when you choose to sell your practice. In some cases, the new owner may wish to purchase the practice but not the building. Receiving the purchase price of the practice plus monthly lease payments during your retirement years serves as a great source of income.

5. Credit Cards

Score: Bad Debt
On the whole, credit card debt represents a bad form of debt. Carrying a significant balance on one or several cards will lower your credit score significantly and signal to bankers that you are living beyond your means. In many cases, sizeable debt on credit cards represents that you may be borrowing money to maintain a lifestyle rather than to grow your practice.

When it comes time to expand your practice, build a new building, purchase new equipment or make other practice investments, revolving credit card debt will make it much more difficult and expensive to borrow. Banks are loaning money to dentists because dentists still represent a good investment. But, if you have $30,000 in credit card debt, the path is much more difficult.

With all bad debt, the goal is to dispose of it quickly. We encourage our clients to pay off their credit cards quickly. Within one to two years, they see their score rise considerably, making money cheaper for expansion and growth.

When is debt a bad deal?

When is any form of debt a bad deal? Debt becomes a bad deal if you have a one-month downturn and you cannot meet your liabilities. Debt can be crushing to a dental practice that has not planned effectively for the ups and downs of their practice.

As a guiding rule, we encourage practices to maintain enough in reserve to be able to cover expenses even if your practice drops by as much as twenty-five percent in a given month. If your average month is $100,000, keep enough in reserve to cover a twenty-five percent drop to $75,000.

In my experience, practice leaders who understand the power and pitfalls of debt while using it wisely tend to thrive. The choice is yours. Go for it!

Your Thoughts

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