After four years of undergraduate education, four years of medical school, and then three to seven years of residency, you’ve become an extremely well-trained doctor. And you have two choices: get a job practicing your specialty at a hospital, clinic, or research facility, or open your own practice. There are risks and benefits to both routes, but if you’ve decided to open your own practice, you’ll likely need some kind of medical practice financing to get up and running.
And despite all of the years of study and education, M.D. degrees don’t come with an M.B.A., so as a medical professional, it’s important to understand the ins and outs of medical practice loans and owning a healthcare business while practicing medicine.
How to get a business loan for a medical practice
The good news is that most lenders consider medical practice financing a good risk. Doctors typically have a stable income and a high-earning potential, so loans for medical practices are a relatively safe bet. Doctors also have low default rates compared to some other kinds of small businesses.
However, most doctors, especially those that have just finished their education, leave school with a significant amount of student loan debt. In 2017, the average medical school graduate was carrying almost $200,000 in student debt. When considering taking out a loan for a medical practice, you’ll want to take into account the amount you’ll pay on your business loan as well as your education loan to make sure your cash flow stays positive.
Another element to consider when opening a medical practice is the expensive medical equipment you might need to invest in to properly diagnose and treat patients. This adds another level of complexity to your decision to open a medical practice.
When it’s time to secure financing for your practice, you’ll need to have several things prepared for your application.
First, you’ll need to have set up a business entity. In the past, most doctors ran their practice as a sole proprietorship or partnership between several doctors. However, today, as the business of healthcare has changed, many doctors or groups of doctors choose to operate as a C corporation (C Corp), S corporation (Subchapter S Corporation), LLC (Limited Liability Corporation) or limited liability partnership.
You’ll want to consult with both an accountant, lawyer, and insurance agent to determine the best option for your business before moving forward with financing.
Once you have your business in place, along with a Tax ID, you’ll need some personal information like your credit score, personal income tax returns, and medical license. You’ll also need to provide proof of insurance, an estimate of your gross annual revenue, and any relevant business documents, like a business plan.
Depending on the kind of loan you're applying for, different banks and lenders will have different requirements, but it’s best to have your paperwork in place before you start the process to avoid any delays.
Then, you’ll complete an application and apply for a loan.
What are the loans available for doctors & healthcare professionals?
Like other small businesses, many consider a Small Business Association (SBA) loan to be a good option for doctors too. SBA loans typically have lower interest rates and longer terms than other types of loans, and since they’re backed by a government organization, they’re even less risky for the bank funding them. However, because of the amount of debt doctors typically carry from their education costs, a SBA loan might not be a feasible option.
You can also apply for a commercial bank business loan as a doctor. You’ll typically need a down payment of at least 20% of the amount of your loan to apply for a traditional bank loan.
Some doctors, for various reasons, consider online or alternative lenders to fund their medical practice. This can often be an option for an established practice that needs to finance an equipment purchase, or to fill a temporary gap in cash flow to keep staff paid or necessary supplies in stock.
Lastly, many medical professional establish a line of credit that they can access when needed to cover expenses. This kind of loan functions a little like a credit card, on which you’ll need to pay interest monthly on the amount you’ve borrowed, but which will replenish when you’ve repaid any principal.
How to find the best loan for your needs
Finding the best loan for your practice needs at a given time depends on your needs. If you’re just getting started, you might want to consider a SBA loan to open a practice.
Later, you might need new diagnostic equipment that would require a shorter term loan to make critical purchases.
Once things are up and running, you’ll almost certainly want to make sure you have a line of credit in place to keep things running smoothly in between insurance payments. You can also use this type of funding to support expanding your business, for example, to meeting payroll for a new hire while that doctor builds a patient following.
How to apply for a loan as a medical professional
Applying for a loan as a medical professional is not unlike applying for a loan for any small business.
The main difference is that you’ll need to provide the bank or lender with more information about your professional credentials, including licenses and insurance coverage, before securing the loan.
Like with other types of financing, however, once you’ve determined an interest rate and loan term that you’re comfortable, you’ll gather your paperwork and fill out an application for your loan.
Common uses of medical business loans
Doctors take out healthcare business loans for many reasons such as establishing a new medical practice. A doctor may also need to take out a loan to purchase an existing practice, which can be more economical than starting from scratch.
Buying a practice also gives you valuable financial information about the annual revenue or a practice, along with information about the market the practice is operating in that might not be possible when starting a new practice.
Sometimes, a doctor might need to grow a practice by adding staff, technology, or even to pay another doctor to treat patients. Increasing the working capital of a practice with a loan can help accomplish those goals.
Of course, equipment financing is a big reason a medical professional might need a loan. Equipment loans are typically structured a little differently than a small business loan for two reasons:
The first is that the equipment serves as collateral for the loan. The second is that medical equipment typically becomes obsolete after a period time. No one wants to pay for an MRI machine over 20 years that is no longer relevant to medical technology after seven years.
For this reason, some medical practices choose to lease equipment instead of taking out a loan to purchase it.
Pros & cons of medical practice loans
Like any other kind of borrowing, loans for physicians come with pluses and minuses.
The pros include:
- Often, starting a practice is a lucrative way to earn a living as a physician. So even though the idea of taking on more debt can be intimidating, it can be the best way to eventually pay back student loans while making a living.
- In general, banks and lenders are open to lending to start a medical practice, for the reasons stated above including the fact that the default rate for doctors is low. So taking out a medical practice loan can be easier than borrowing money for other purposes.
The cons you might consider are:
- As a physician, your strengths and passion might not be in running a business. Taking out a loan to start a practice means that meeting your financial obligations will become a part of your career, and for some doctors that might take the focus off of your patients.
- The fact is, more debt is more debt, and depending on your personality and aversion to risk, a medical practice loan might feel burdensome.
You’ll want to base the decision you make in way that’s not unlike how you treat patients, using facts, numbers and objectivity, not emotions. Whatever you decide, the bottom line is that making an informed decision about borrowing will be good for your career and for your patients.