There are 5 questions to ask before getting a practice loan.
One of the traits of a successful business owner is the ability to assess which risks are worth it and which are not. There are 5 questions to ask before getting a practice loan. The knowledge of when to jump means the difference between financial success or ruin. While none of us have a crystal ball, there are questions you can ask yourself and your partners when considering medical financing for your practice. The 5 questions to ask before getting a practice loan will help you determine if taking out a small business loan is an acceptable risk for your medical practice.
1. How old/established is your practice?
While older isn’t always better, it does mean that you have established a presence in your community that is a type of capital. You most likely have a high referral rate and return rate, which means you can project your next year’s revenue with a low margin of error. You know how much you will make in the next five years and can determine the size of loan your medical practice can safely take out.
With younger and smaller practices, taking out a small business loan can be a risky prospect. If your practice is small in both staff and clientele, you can’t yet accurately predict what your revenue for the next year will be, let alone what the next five year will look like. At this stage of business, if you need a loan for “life-support” functions of your practice, like equipment, you have to assess whether or not the “quality of life” for your business will drastically improve – and if taking out a small business loan is worth the risk.
2. What is the current financial health of your practice?
Regardless of whether or not your practice is young or old, you need to determine if it is financially in good health. Questions for making this determination would mean:
- Is your revenue consistent?
- Are your employees compensated well for their time and efforts?
- Are you easily able to cover the cost of your overhead?
- Are you currently able to pay all your current expenses with money to spare?
If you were able to answer yes to all those questions, then have a clean financial bill of health.
If you are struggling to make ends meet and feel that you need a loan to help fill the gaps where your practice is failing, we suggest that you choose not to take out a small business loan; you may “fix” your financial woes for the short term, but you are accruing debt that you can’t afford, while not fixing the true structural problems in your practice that are costing you revenue.
3.What, How, and How Much?
What do you need the money for? How urgently do you need the money? And how much money do you need?
We lump these questions together because each question’s answer impacts the next.
A good rule of thumb when determining what you need the money for is to ask if the loan is going to be used to cover the “wants” versus the “needs” of your medical practice. Do not accrue debt to satisfy business “wants”; loans should be used on projects that will increase the revenue of your practice.
After assessing what the loan will be used for, consider whether that need is urgent or merely important. If the loan is necessary in order to make your business to meet code, the need is urgent. But if you want the loan to fix or expand part of your clinic, it qualifies only as “important.”. Determining the urgency of the loan can help you plan the size and timing for taking out a loan.
Finally, the amount of money you take out needs to be reasonable –and by reasonable we mean that you can pay it off in the next ten to fifteen years. If the amount of money you need can not be paid off in that amount of time, you need to reevaluate the organization of your medical practice and see if you can find a different solution that will not require putting your practice into crippling debt.
The prospect of increasing the flow of usable funds can often entice business owners to jump first and think – or regret – later. Before making a decision that can have such a critical role in the financial sustainability of your practice, take some time to write out the answers to these questions. Leave them on the desk, talk about them with others who care about your success and that of your practice, sleep on it for a day or seven. Giving it some time allows reality to catch up. If you come back a week later and feel secure in your decision, you’re more likely to good about it once the money is in your account.