How to Fund a New Business by Tony Dickinson

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Dentaltown Magazine

An in-depth look at your available options and costs


by Tony Dickinson


Owning your own practice involves much more than simply being a skilled practitioner. To be successful, you have to be part human resources manager, part marketing genius, part operations specialist and part financial guru. One of the most important areas of knowledge is finance—if you know how different financial products work, you can determine what makes the most sense for your immediate and long-term goals and needs. Let’s look at an example.

CASE STUDY
Peter the Prosthodontist wants to expand his practice to have a second office in another part of the city. He’s got a backlog of patients waiting to see him, many of whom drive across town to come to his office. If he puts in a second location, he can make the patient experience better by reducing travel time and shortening the wait for an appointment.

Peter is very smart with his money. He wants to make every penny work hard to build this new office, so the cost of setting up doesn’t slow his ability to be profitable sooner rather than later.

For the new practice location, he’ll need:

  1. Dental office lease: $2,000 per month
  2. Waiting room furnishings: $5,000
  3. Office and desks, chairs and storage, private area for breaks: $15,000
  4. Staffing: $50,000 (not included in startup total since resources are shared)
  5. Marketing: $10,000
  6. Technology: $30,000
  7. Exam room equipment: $100,000
  8. Insurance: $2,750

If all goes as planned, Peter anticipates it will cost about $165,000 to set up the new location. There are a number of ways Peter can fund it. Learn what he decided after he considered the options discussed on the next few pages, and after he analyzed the options with his financial adviser.

TYPES OF FUNDING

Credit card

Pros:
  • Can be easy, depending on your personal credit score.
  • Minimal paperwork.
  • Interest payments on the credit card are deductible as a business expense, so you can reduce the amount of your business earnings subject to tax for these interest payments.
  • Can be depreciated over the useful life of the equipment.
  • Your payment history will affect your personal credit score, and if managed properly, will positively affect your ability to obtain future personal credit.
Cons:
  • If you’re careless with your payments and spending, it will have a negative impact on your score.
  • If the business fails, you’re personally responsible for repaying that debt.
  • The interest rate can be expensive if you carry a balance.
  • It’s easy to comingle business and personal expenses—a giant no-no for business.

Cash

Pros:
  • Can be depreciated over the useful life of the equipment.
  • Using cash means there’s no debt. That’s a comfortable place to be.
Cons:
  • Once your cash is spent, reserves are depleted.
  • You may have fewer financial resources in case of a personal or business emergency.

Equipment Loan

Pros:
  • Can be depreciated over the useful lifeof the equipment, or written off in fullin the year of the purchase with Section?179 advanced depreciation.
  • The equipment is collateral for the loan.
  • With some lenders, there is no prepayment penalty.
  • Some lenders allow principal balance payoff.
  • Money is paid right to the vendor.
  • Simple to apply.
  • Interest can be deductible.
  • May boost your business credit score.
Cons:
  • Potential balloon payment or interest rates may change payments across the life of the loan.

Working capital

Pros:
  • Simple and quick, especially when compared with the alternative of securing a home equity or business line of credit.
  • Unsecured.
  • Frequently, you can have funds in as little as 24–48 hours after applying.
  • You are not required to provide receipts or explanations of purchases.
Cons:
  • Typically a shorter repayment term, so monthly payments may be more.
  • Because of a lack of security for the loan, the rates will be higher than the typical bank line of credit that may be secured by your home or other assets and accounts.
  • The limits may also be lower than you are accustomed to being offered on a secured line of credit.

Bank loans

Pros:
  • Can be depreciated over the useful life of the equipment.
  • You may be able to roll all of your debt into one monthly payment.
Cons:
  • They’re based on your personal credit score so it may be difficult to qualify, depending on your current debt such as mortgage, car payments and student loans.
  • They may require a personal guarantee and are often secured by a blanket lien on everything in your office.
  • Applications involve a lot of paperwork.
  • They report to your personal credit, so if you run into issues, it will have long-lasting impact.
  • You will have used your banker equity, meaning it may be hard to ask for another loan (even a personal loan).

Lease

Pros:
  • The lessor usually maintains the equipment, so you don’t have to.
  • It does not report to your personal credit.
  • No down payment.
  • Easy application.
  • There are two types:
    • Operating lease: Lower payments, and you can purchase the equipment at the end of the term for fair market value. You can trade in the equipment and start a new lease, or buy out at the end.
    • Capital lease: Higher payments, with a very inexpensive buyout at the end ($1 or 10% of the purchase price are common). This nominal buyout is sometimes called a PUT (payment upon termination), and the buyout is required rather than optional.
Cons:
  • You’re locked into a contract.
  • If your business changes, you may have payments on equipment you no longer want or need.
  • You don’t own the equipment, so you can’t sell it.
  • Potential balloon payment or interest rates may change payments across the life of the loan.
  • There are different buyout implications that may affect your taxes.
  • Although leases don’t have a visible interest rate, the equivalent is often “baked into” the monthly lease payment.
  • You may pay more for the equipment than you would have by purchasing it up front.
  • If the lease is long term, the equipment may be obsolete before the term ends.

WHAT DID PROSTHODONTIST PETER DECIDE?
Now let’s take a look at how Prosthodontist Peter decided to manage his finances when adding a new, second location to his practice.

1. Facility
Peter has chosen to lease a space that’s already built out for a dental practice, rather than building from scratch. Real estate can be a good investment, but right now he’d prefer to invest in his practice. Leasing will save hundreds of thousands of dollars up front, and he’s made a deal with the building owner for right of first refusal should the owner decide to sell. Peter sees that as a win-win.
Peter will sign a lease.

2. Waiting room furnishings
Realizing that visiting a prosthodontist can be intimidating and patient comfort is important to a good experience (and lots of word-of-mouth business), Peter wants to create a warm, welcoming, safe space for both adults and children. Instead of sections of hard reception seating, he intends to buy gently used furniture from a friend’s newly updated family room. Soft, squishy sofas and oversized armchairs will help people relax. Paying cash will get him a lot more bang for his buck.
Peter will pay cash.

3. Office and break room furniture
In Peter’s mind, great staff is even more important than marketing because the team increases production while providing a better patient experience. When it comes to his receptionist and staff areas, he knows his team will be most effective when their workspaces are laid out efficiently and comfortably. He’d rather spend a little bit more on good ergonomic chairs than go cheap and possibly have to deal with back pain down the road. Peter will use working capital.

4. Staffing
His current office manager will manage both locations and the implant assistant and lab technician will travel between the two offices. Each office will have a dedicated dental assistant and receptionist, so he’ll need to find and place those roles.
Peter will pay staff out of generated revenues and use his working capital if needed. He has a personal line of credit available as a backup in case of emergencies, but he’d prefer to keep that on hand for, well, personal use.

5. Marketing
Even though there’s currently a lot of demand for his services in this new part of town, Peter will need to do some marketing to ensure there’s enough traffic to make the location self-supporting. He’ll invite his current patients to an open house and send a direct mail invitations to prospects in the area. Of course, he’ll need new signage and printed materials with the new address. He might join the neighborhood association and do some sponsorship. Peter will use working capital.

6. Computers, printers, practice management software/EHR equipment
While Peter considers himself a bit of a tech guy, he knows when he’s out of his league. He’s bringing in a consultant to ensure wiring is appropriate for all the digital needs of the practice. Even though the previous tenant was a dentist, he wasn’t as up-to-date as Peter’s plans require. As a result, there’s some work to be done.

Peter will also need to purchase five new computers and printers, and practice management software. While he’ll purchase the hardware outright, much of the software he needs, including EHR products, is cloud-based and licensed per seat. He’ll also have tablets with access to videos and noise-deadening headphones in the treatment rooms.
Peter will use equipment financing.

7. Equipment for one exam room
Peter will need to equip the treatment rooms appropriately. Purchasing a mix of new and high-quality used items will cost approximately $100,000.
Peter will use equipment financing.

8. Insurance
Last, but definitely not least, Peter needs to protect his new venture with appropriate insurance. Professional liability ($1,600 average annual premium), business owners package ($650 average, based on $100,000 contents coverage) and workers compensation ($500, based on $50,000 annual payroll) will cost Peter $2,750 annually.
Peter will use insurance premium financing.


As a business owner, every day is a new opportunity and every day comes with a number of decisions to be made. Having a solid understanding of the many aspects of running a business will help lead you to greater success. Recognizing opportunities and knowing how best to take advantage of them, is one of the most valuable strengths you can have as a business owner/entrepreneur. Always consult with your financial or tax adviser before making financial commitments. They are key players on your success team!

Author Bio
Author Tony Dickinson joined NCMIC Group as vice president of strategy and business development in 2017; today, as chief operating officer of the finance company, he overseees four lines of business and all the sales and operations, with $110 million in assets. Dickinson was recognized by the Greater Des Moines (Iowa) Leadership Institute with the Community Visioning Award for Inspiring. He is past president of the Boys & Girls Clubs and the Mount Mercy Alumni Association, and is currently on the board of the Iowa Sports Foundation. He and his wife, Kim, have two sons and a daughter.
 

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