The landscape for new dentists can be quite scary. For example, the average dental student graduates with more than $240,000 in student loan debt. This amount represents an increase of more than 66% over the last decade. This debt load can jeopardize the aspiring business owner’s motivation to purchase their first dental practice. After all, is it smart to take on an additional $450,000 in practice loan debt?
Let’s take a different approach to looking at debt. When a person buys a business—in this case, a dental practice—the business pays the debt, not the individual. Even though almost all dental practice loans require a personal guarantee, but the borrower of the money is the actual business.
Making loan payments on a new car, taking on credit card debt to pay for an expensive vacation, or even purchasing a new home can be troubling when a person is saddled with high student loan debt. Why? None of these outcomes actually make the borrower money. Borrowing money to purchase a dental practice can actually create a better cash flow position even after adding debt. Also, 100% financing to purchase a dental practice is readily available, so there is no need to invest current liquidity—and that protects the dentist’s current personal financial statement.
Here’s an example: Let’s assume a dentist has been working as an associate for three years and has made an average annual salary of $150,000. The associate is now interested in buying a practice for $450,000. Historically, this practice generates revenue of $600,000. On average, a dental practice nets 40% profit to the owner. So in this scenario the practice net income would be $240,000. A 10-year loan for $450,000 requires roughly $4,700 monthly payments, or $56,400 annually. After the dental practice pays the loan, the net income to the owner is $183,600 ($240,000 original net minus the $56,400 debt payments). We can see that the associate in this example will actually increase their annual income by $33,600 even though they took on an additional $450,000 in debt. Let this way of looking at debt—and the example above—serve as motivation to fulfill your dream of owning a practice.
The current student loan situation can be overwhelming, so most new dentists will graduate with a goal to pay off all of their debt as quickly as they can, and they’ll be prudent about borrowing more money. They will work as associates in practices for longer periods of time than necessary because they fear acquiring additional debt. But buying a practice could be a way to pay off the debt more quickly. By purchasing a business and allowing it to pay the practice debt first, a dentist can increase income and
improve cash flow. Borrowing money is intimidating—and so is taking the leap from associate to practice owner—but the additional debt can actually be worth it in the end.
This article is for informational purposes only. Please consult your tax advisor, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.
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