Getting Your Financial House in Order

If you’re thinking about purchasing or starting your own practice within the next few years, now is the time to get your financial house in order. This means ensuring you have a strong financial profile that generates borrowing power and a strategy for creating long-term financial success.

Importance of a Healthy Credit Report

Developing a healthy credit profile is the first step in building financial strength. Credit is the basis for virtually all large

financial investments, whether you’re buying or building your first dental practice — or your first home. Personal lifestyle choices, from boats and RVs to second homes and property, are typically driven by the ability to obtain credit.

Allison Farey

responsibility you represent.

A poor credit report can limit the amount of financing available to you and constrain the repayment terms of your financing package.

The credit reports generated by the national consumer reporting companies Equifax, Experian and TransUnion form the basis of your credit profile. The credit report is one of the key documents that lenders use to determine your credit worthiness and includes information about where you live, your debts, your payment history, public record information and all inquiries about or applications for credit.

Understanding Your Credit Rating

Your credit rating or score is separate from your credit report and is another aspect of your financial profile. It is a numerical expression of your credit worthiness based on a statistical analysis of your credit files. Officially called a FICO score (from the former Fair Isaac Corporation, which invented the score), credit scores range from 350 to 850, with 723 being about average for the U.S. Those with scores below 600 are typically

The consumer reporting companies sell your credit information to companies other than lenders as well, such as mobile phone companies, insurance companies, employers and landlords, for their use in evaluating the level of financial risk or

considered high risk borrowers. People with the same credit rating can have very

Allison Farey Getting Started

House in Order

different credit profiles depending on such factors as how many accounts they hold and how much available credit they use.

How Credit Scores Affect Interest Rates

Your credit score directly impacts the interest rate you receive on a loan. The most critical factors for your lender when evaluating your loan application for a practice purchase or start-up are the amount of your personal debt and your overall credit rating. Credit decisions for practice acquisition loans are usually based on an assessment of practice cash flow and your ability to repay the loan while covering your business and personal expenses. Credit decisions for practice start-up loans are primarily based on your

Impact of Credit Scores on Interest Rates

Credit Score Rate Practice Loan Payment

(sample only)*

766+ 5.55% $3,263

765 – 726 5.95% $3,323 (+$7,000 over life of loan)

725 – 665 6.35% $3,384 (+$14,000 over life of loan)

Below Applicant will probably be turned down

*Payments based on a 10-year, $300,000 practice loan

debt-to-asset ratio. The amount of your personal debt will factor directly into both equations.

can be significant in the following ways:

Generally, a low level of debt and average to good credit rating yield a higher credit limit and lower interest rate. A higher debt and average to poor credit rating usually mean a lower credit limit and higher interest rate.

When you are charged a higher interest rate for a more limited financing package due to an unhealthy credit profile, you ultimately have less cash flow to effec-

Potentially a higher hurdle for achieving meaningful financial success

Five Actions That Can Ruin Your Credit Score

FICO has cited five credit actions that can ruin your credit score — actions you should completely avoid if possible. The chart below shows the negative impact these actions typically make to two sample credit scores.

-- “Maxing out” a credit card is considtively manage and grow your business. The impact on the future of your practice

ered a sign that you are in over your head. It doesn’t matter to the score formula whether you carry a balance or pay off the card when you get your bill – the impact to your credit score is the same. -Skipping a payment can be a problem if you miss an entire payment cycle. Consider setting up automatic payments, particularly for large debts. -Settling a credit card debt can take a bite out of your credit score

Less funding to purchase or start the practice you truly want • Inability to fully develop a competitive operation with equipment and technology investments • Fewer funds for start-up salaries, marketing and overhead • Smaller profit margin due to higher loan expenses

Credit Action 680 Score Impact 780 Score Impact

Maximized credit card -10 to -30 points -25 to -45 points

30-day late payment -60 to -80 points -90 to -110 points

Debt settlement -45 to -65 points -105 to -125 points

Foreclosure -85 to -105 points -140 to -160 points

Bankruptcy -130 to -150 points -220 to -240 points

Source: FICO: 5 Ways to Kill Your Credit Scores, Liz Pullam Weston, MSN Money, November 12, 2009

with each missed payment while you work out a settlement. Try negotiating a monthly payment plan instead. -Losing a property to foreclosure is a severe blow to your credit score and may have implications for your future ability to get a mortgage. -Filing for bankruptcy drops your credit score significantly and makes new credit extremely difficult to obtain.

10 Simple Steps to Good Credit The good news is that you have the ability to build and manage a strong financial profile. Following are 10 simple steps you can take right now to improve your credit report and rating:

1. Maintain at least two or three revolving credit accounts (such as credit cards and lines of credit). This indicates you are credit worthy and able to manage debt. 2. Avoid applying for credit from too many lenders. Multiple credit inquiries made within a short timeframe will negatively impact your credit rating. 3. Demonstrate that you know how to use your credit wisely by not using all the credit available to you. 4. Make on-time monthly payments on credit cards, mortgages, installment loans and student loans. Remember, most service providers such as doctors’ offices and cell phone companies do report late payments and collections to credit bureaus. 5. Consolidate your personal loans in order to improve your cash flow and

Developing a Strategy for Financial Success

Actions that Can Ruin Credit Scores

financial profile. 6. If you are in dispute with a creditor, continue to make minimum monthly payments while you work towards a resolution. 7. Notify creditors in writing of your address change. 8. Avoid co-signing or guarantying a loan for a friend or family member, as it has the same impact on your credit as being the primary borrower. 9. Review your personal credit report at least twice a year to ensure accurate reporting of all accounts. Inform all credit bureaus in writing of any discrepancies. 10. Keep copies of all agreements, documents clearing judgments or liens, and letters from creditors clearing incorrect information reported on your loan history. Remember, all credit information stays on your records for up to ten years.

Create business and marketing plans that specify how you will achieve annual growth in number of patients and level of production. • Create a regular schedule for reinvesting in your practice to keep it current and competitive, for example, with equipment and technology upgrades. • Monitor your practice statistics on a monthly basis so you can quickly spot areas of weakness. • Work with your tax advisor or accountant to take full advantage of tax benefits for small business owners, such as the Section 179 deduction for equipment purchases. • Create a realistic plan for retirement that does not rely exclusively on the sale of your practice, but includes other investments, as well. • Partner with a lender who understands the dental industry and can structure a financing package that satisfies your particular needs. Having a well-managed financial profile helps secure the financing you need to purchase or build the practice you truly want, while a strategy for financial stability works to ensure the long-term success of your practice. Don’t procrastinate — it’s never too soon to start getting your financial house in order. ■

Financially successful business owners understand how to recognize and solve problems as they arise, and take advantage of opportunities that present themselves. They create a plan for their future, modifying the plan as circumstances require. Following are general guidelines for developing a strategy for long-term financial success for your practice. For a complete financial plan, meet with your CPA or financial advisor.

Allison Farey, President of Wells Fargo Practice

Finance, has more than 25 years of experience in dental practice lending. Wells Fargo Practice Finance specializes in helping dentists acquire, start and expand their practices with its customized financing and signature Practice Success Program. For more information, call 888.937.2321 or visit wellsfargo.com/dentists.

Do not take on more debt than you can comfortably handle. Work with your CPA to determine the appropriate amount of debt for your situation.

Wells Fargo Practice Finance We’re here to help you take the next step

When you’re ready to purchase or start a practice, count on Wells Fargo Practice Finance to help you achieve your practice goals.

Up to 100% financing to help you acquire an existing practice or start one from scratch · Preferred pricing for ADA® members with rates at historic lows · Expert project support by experienced practice financing specialists · Complimentary business planning tools, educational resources, and practice management consulting to help you successfully manage your transition to ownership

Wells Fargo Practice Finance is the only practice lender endorsed by ADA Business ResourcesSM