You learn how to fill cavities and keep teeth clean and healthy in dentistry school. What you don’t learn is how to raise capital and manage business debt.
That can make life after dentistry school challenging, says Genaro Romo, who started his career in Chicago in the 1990s. He quickly realized that being a successful dentist meant being a successful small-business owner.
“We were trained to be dentists,” Romo tells NerdWallet. But “you need to know how to run a business.”
Choose your path: group practice or solo
After graduating from school, dentists essentially have three options. One is to join a practice as an associate and “work your way up,” Romo says. That’s what he did, and it was a successful strategy. He eventually struck out on his own, setting up his own practice; today, he has a 20-person office in Chicago.
There are two other major options:
1. Build your practice from scratch. This can be exciting, but it’s expensive. A dentist launching a startup practice typically requests a loan in the range of $350,000 to $500,000, says Gavin Shea, a senior director of sales and marketing at Wells Fargo, where he’s worked with hundreds of dentists.
Between 50% and 60% of the funds goes toward building out an office, which usually involves big investments related to specialized plumbing and electrical needs, he tells NerdWallet.
The basic dentistry workspace is called an operatory. A fully equipped setup, which includes cabinetry, dental chair, lighting and digital X-ray equipment, can cost “anywhere from $25,000 to $50,000 for each operatory,” Shea says.
The startup route can also be tricky; Romo notes the importance of having a clear business plan. Overspending based on a fuzzy growth strategy is a common mistake, he says, though he adds: “Make sure you have room for growth.”
Some dentists are overly cautious with investment only to find that, as their business grows, “you have nowhere to go,” Romo says. “They maximize their space and they have to start over in a new location.”
And just as with buying a home, location is key, Romo says. “You really need to do research,” he says. The key question: “Is there a need for a dentist in that location?”
2. Buy an existing practice. Acquiring an existing practice, such as one owned by a dentist who’s about to retire, is a common route taken by new dentists. As with buying a house, it’s important to accurately appraise the value of the practice.
It’s easy to make a mistake. For example, Romo says, “You could be buying an office that may not be as busy and the equipment is very outdated.”
“Most independently owned dental practices will sell [for] between $500,000 and $750,000,” Shea says. A dentist requesting a loan usually also factors in “some short-term working capital to cover the first few months of ownership.”
Choose your financing: bank vs. alternative lender
While Wells Fargo declined to disclose interest rates related to dentistry practice financing, the financing it offers includes SBA-guaranteed loans, which typically carry low interest rates. An SBA loan is usually based on the current prime rate plus an additional markup rate, known as the spread, of 2.25% to 2.75%. At the current prime rate of 3.5%, a typical loan would charge 5.75% to 6.25% interest.
Bear in mind that the SBA has strict requirements and the application process can take months. But a traditional bank is not your only option; alternative lenders tout the speed of their application and approval processes, which may range from a few hours to a few days.
Some alternative lenders now also offer financing specifically for new dentists. However, interest rates are higher than those offered by banks. Check out the different small-business loans options on the NerdWallet Best Business Loans page.
When making financial plans for a dental practice, “Everybody’s situation is different,” Romo says. But, he stresses, “You have to remember you’re investing in your practice.
“If you’re investing in technology, it builds stronger patient relationships,” he says. “It’s not a luxury. If everything works out, it’s probably paying for itself.”
Get help from the experts
Whether you start a brand-new dental practice or buy an existing business, Romo offers two key tips:
Find a financial advisor who specializes in dental practices
Some professionals specialize in giving dentists financing advice for starting or expanding a practice. “There are CPAs who specialize in dental offices,” Romo says. “There are dentists who also have accounting degrees” or other kinds of training that qualify them to offer guidance.
And the best way to find an advisor is through professional organizations of dentists. Which leads to tip No. 2:
Join professional associations
Romo urges new dentists to reach out to other dentists from the beginning. He did so by joining the Illinois Dental Society and the American Dental Association, and was so impressed with the ADA’s work that he became one of the organization’s spokespeople.
The ADA’s Center for Professional Success website offers information and tips for dentists, including a calculator for managing business debt. The California Dental Association has a practice support page with information and tips related to the business side of a dental practice.
Some dental associations also have relationships with banks. The ADA, for example, works with Wells Fargo, which has a practice finance page dedicated to serving the financing needs of dentists, optometrists, doctors and veterinarians. It offers information on key aspects of starting and growing a dental practice, including opening a new location and buying new equipment.
To get more information about funding options and compare them for your small business, visit NerdWallet’s best business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
Updated Nov. 17, 2016.
Image via iStock.