How DCs can nurture good debt and manage bad debt
MANAGING THE FINANCIAL HEALTH OF YOUR PRACTICE as a chiropractor is as essential as caring for your patient’s well-being. Understanding the intricacies of debt can make or break your practice.
Debt can be a tool for growth
Debt has a bad reputation in the chiropractic industry. Many doctors start with so much student loan debt that they are hesitant to take on more. However, not all debt is created equal. Some types of borrowing can benefit your practice’s growth and financial stability.
Using business loans to fund opportunities that increase profit will often lead to quicker growth than using earnings from your existing practice alone. This approach allows you to foster growth by investing in new service lines, additional office space, or expanding into additional locations.
When used correctly, business debt can be a tool that works for, not against, your efforts to grow your practice into something bigger and better over time.
What is good debt?
Good debt is a loan that can potentially increase your net worth.
For example, if you borrow money and invest it in real estate or revenue-generating equipment, the increased income (or decreased expenses) from those investments will eventually lead to an increase in your overall wealth.
For a chiropractic practice owner, the primary determinant of practice value is the practice profit (gross revenue minus expenses). Therefore, for chiropractors who want to grow their practice value (and who doesn’t?), good debt would be anything that increases their practice profits.
Typically, you would use good debt to finance equipment, technology, expanded office space, advertising and marketing, and more. All these things help enhance service offerings, streamline operations, and attract new clients —— all of which grow the long-term value of your business.
When and how to acquire good debt
There comes a time in the growth of every chiropractic practice when expansion, upgrades, or investments become crucial for continued success. This is when good debt comes into play.
When considering acquiring debt for your chiropractic practice, it’s essential to weigh potential benefits against financial risks. Conduct thorough research on the specific investments, analyze the projected return on investment (ROI), and consult professionals to understand the best financing options. With this knowledge, you’ll be well-equipped to make informed decisions about acquiring good debt, setting your practice on the path to continued growth and success.
Good vs. bad debt
While you can leverage debt to increase revenue, you can also find yourself heading down a more treacherous path using bad debt. Bad debt refers to any debt used for purchasing assets that decrease in value over time, or investments that fail to generate sufficient income or growth.
In chiropractic practice, bad debt examples may consist of:
- Borrowing to acquire equipment that fails to enhance patient care or revenue.
- Taking high-interest loans for non-essential projects or renovations.
- Accumulating credit card debt for operating or personal expenses.
- Financing costly marketing campaigns without a tangible return on investment.
- Expanding the practice without proper financial planning or assessment of potential returns.
Consequences of bad debt
Bad debt can snowball quickly. When the cost of the debt exceeds its increased revenue, it decreases the clinic’‘s profitability. When a business is burdened with excessive debt, it can become overwhelmed and struggle to maintain operations.
If a chiropractic practice fails to meet sales projections, the debt can spiral out of control. It is imperative that the savvy business owner recognizes these trends early and takes aggressive corrective action to decrease the business expenses. Otherwise, late payments and defaults on debt will lower the business’s credit score. This makes it more challenging to secure favorable debt in the future, further limiting the potential for practice growth and success.
Why you need to understand good vs. bad debt
Cash flow issues are often a significant factor in why businesses fail. That’s why you must organize your finances to leverage debt instead of being swallowed up by it.
New business owners should be especially cautious with taking on debt because the tendency to assume growth may result in a more casual approach to taking on more debt.
I have met with many doctors who need to sell a practice that they have grown to despise because the practice debt has grown to unsustainable levels. It’s all too easy to slide down the slope of bad debt. It’s far better to know from the start how much is too much so you can manage your finances and growth responsibly.
What’s the right amount of debt to carry?
There are a variety of opinions on what’s an appropriate amount of debt for a chiropractic practice. No two businesses are alike, so a helpful tool for calculating a sustainable amount of debt is the debt-to-income ratio.
The debt-to-income ratio is important because it’s used to evaluate the financial health of your business. It can also help you determine whether or not you should take on new debt, such as a loan or line of credit.
The debt-to-income ratio is calculated by dividing total monthly debt by gross monthly income. For example: $500/month credit card payments divided by $5,000 per month in gross revenue = 10%. If this number is higher than 35%, you may want to reconsider.
Though we still advise working with a professional to get a clearer picture of the financial health of your business, the debt-to-income ratio is a helpful tool to give you a general idea of how much you can afford without risking the health of your business.
Dealing with the pressures of debt
Business owners will experience stress over debt management if they own debt to cover cash flow gaps. Instead, consider embracing debt as a strategic resource.
Yes, you need to be smart with debt. Do not run to the bank to get as many loans as possible. You should, however, shift your perspective. Effectively using debt to grow your business and improve its value can eliminate your need to rely on bad debt and reduce your anxiety in the long run.
Ways to be wise with debt
Chiropractors spend a lot of time thinking about the health of their patients, so the business side of the practice sometimes plays second fiddle. That’s why practice owners can be at risk of making less-informed decisions when taking on debt.
There’s no one-size-fits-all approach to leverage debt in your business. However, there are some general ways to ensure you leverage debt to make your practice succeed long-term:
- Make sure you invest profits in business growth and pay yourself.
- Stay on top of your finances. Review your practice financial statements often with a professional until you are confident that you understand your financial situation.
- Build a savings cushion for both yourself and your practice.
- Consider variable-rate debts with no prepayment penalties, like an SB 7A loan, to manage debt flexibility during periods of high-interest rates.
- Know your options. Existing business owners can often get more favorable lending terms to expand their practices due to increased stability.
What to do if you’re in too deep
If you’re struggling with business debt, consider the following options:
- Set up automated weekly payments to reduce debt faster
- Increase revenue through:
- Launching promotions or providing discounts on treatments.
- Adjusting prices upward while highlighting the value of services.
- Clearing surplus inventory of wellness products or equipment.
- Improve accounts receivable by:
- Following up more frequently with customers.
- Refusing new sales until overdue balances are cleared.
- Engaging professional debt collection services, if necessary.
- Cut expenses wisely without impacting revenue generation.
- Consider trading good debt for bad —– if you bought a larger and more profitable practice you could pay off the debt much faster
- Renegotiate debt terms with lenders for lower interest rates or extended payment plans.
- Explore refinancing options if they offer significant benefits to your business.
- Consider borrowing from friends or family for better terms and lower payments.
- File for bankruptcy as a last resort, understanding its potential consequences.
- Sell the practice if the business cannot recover without a substantial change in expenses.
Navigating business debt can be challenging, but these strategies can help alleviate the burden and restore your chiropractic practice to financial stability.
Strategically leverage your debt
Managing debt effectively is a key aspect of running a successful chiropractic practice. By understanding the difference between good and bad debt, strategically leveraging debt for growth, and staying disciplined in debt management, you can alleviate stress and focus on long-term success.
It’s essential to seek professional guidance when navigating the landscape of business debt. Trusted professional resources can give you access to new financing solutions and walk you through the best ways to utilize debt or tackle it, ensuring you make informed decisions for your practice’s financial health.
Just remember, juggling business debt is a challenge, but with the right mindset and support, it can become a driving force behind your practice’s growth and prosperity.
CRYSTAL MISENHEIMER is the co–founder of Progressive Practice Sales. Their team harnesses the power of today’s technology to help doctors sell and acquire clinics, and save them time, money and effort along the way. She can be contacted at 888-508-9197, firstname.lastname@example.org, or through progressivepracticesales.com.