Around 49.1% of physicians work in private practices.1 If you’re looking to join the ranks of physicians-turned-business-owners, you have an exciting journey ahead. But much of your future success and ability to sustain a profitable practice will depend on the financial details and logistics you work through now.
To help you build your to-do list and create a comprehensive plan, we’ve outlined the important financial considerations to make when starting your private practice.
Startup Costs and Budgeting
Opening up a private practice doesn’t come cheap. After selecting a location for your new office, your next order of business will likely be estimating costs and building a budget. To start, make a comprehensive list of expenses you must account for before opening your doors. If you have colleagues who’ve gone through the process before, they may be able to give you a more realistic understanding of what to expect. Organizations like the American Medical Association also offer in-depth guidance and resources for physicians researching costs and weighing options.
Your start-up and operating expenses will likely include:
- Leasing or buying a space
- Electronic health recordkeeping system and other software
- Operating licenses
- Staff salaries
- Utilities (internet, electricity, water, trash, etc.)
Once you know your opening costs and future operating expenses, build out a projected budget. Knowing how much you’ll need to spend upfront and what’s necessary to operate every month will help you allocate resources more effectively. And as you’re building out your budget, be sure to obtain multiple quotes from vendors.
Don’t forget your budget should include a contingency fund to cover unexpected expenses, such as an emergency visit from the electrician, broken equipment, or other unforeseen costs.
Funding Options and Financing
Once you have an idea of your expenses, your next order of business is to decide how you’ll obtain funding. You have a few different options, each with its own set of benefits and considerations.
Keep in mind that aside from using your savings, each of the options below will likely require you to develop a business plan or pro forma (which is something you’ll want to do anyway). Banks and investors need proof that you’ve done your research and justification for the amount of money you’re requesting.
You may have saved diligently and invested prudently over the years. By the time you’re ready to open your practice, you may have built a sizeable nest egg with enough to cover your initial expenses.
The primary benefits of using your savings are that you’re not taking on debt that accrues interest, and you don’t have to worry about appeasing other stakeholders. Your practice is entirely your own.
But consult a financial professional before removing a large chunk of money from your savings. You wouldn’t want to drain your account only to encounter unexpected expenses later, like car trouble, medical debt, home repairs, etc. You should still be conscious of your other financial priorities when making this decision so as not to put yourself in a situation where you’d have to take on debt anyway (in the form of credit card debt or a personal loan) just to get by.
A business loan is a standard option for many small business owners, physicians included. Like obtaining a mortgage, the bank will need proof that you are a reliable borrower and will repay your loan in full.
The more attractive you look as a borrower, the more favorable the loan terms will likely be. Before pursuing this option, check your credit score. If it’s not considered “good” or higher (670 sits at the low end of “good,” according to Equifax), try building up your credit score before applying for the loan. Paying down existing debt, limiting hard inquiries, and automating payments are common ways to increase your credit score.
Now for the bad news: Bank business loans are hard to come by. In February 2023, only 13.5% of small business loan applications were approved.2. But if you do get approved (and expect that process to take some time), you can snag a decent interest and a loan with flexible terms.
Line of Credit
Rather than a loan, you could take out a line of credit, such as a home equity line of credit (HELOC), based on the equity you’ve built in your home.
Unlike a business loan, you only need to repay the amount you borrow from your line of credit. Think of it like a credit card. If your credit limit is $20,000, that doesn’t mean you must pay back the entire $20,000 each month. You borrow what you need and only pay that amount back (plus interest).
A business line of credit is ideal for covering short-term or higher-than-expected expenses, such as initial start-up costs. If you can provide collateral (such as your home) and receive a secured line of credit, your interest rate will be more favorable.
Revenue Projections and Cash Flow Management
As we mentioned, you’ll need accurate and research-based revenue projections for at least the next few years to obtain a loan or line of credit successfully. Many physicians (at least for the first part of their career) have negative net worths because of their student loan debt. For that reason, revenue projections are essential for medical professionals seeking funding.
You’ll need to consider your estimated patient value—are you looking to serve the masses or create a boutique experience for a select few clients? How will you price your services? At what rate will insurance reimburse you?
You must be strategic about your cash flow management when running your practice. Put some thought upfront into how you’ll bill your patients and the collection process. Some physicians outsource billing to a third-party company, as submitting claims and following up to collect unpaid dues is a timely and complex process.
Insurance and Liability Coverage
Having adequate insurance coverage is essential for any business owner, especially those operating a medical practice. You’ll likely need to obtain a medical malpractice insurance policy, general liability insurance, and property insurance. Aside from that, your lender may require additional insurance policies like worker’s compensation for your employees.
Remember that as your practice grows and evolves, you should regularly revisit your insurance coverage and make updates to maintain an appropriate amount of coverage.
Billing and Reimbursement Processes
Getting adequately paid for your services is critical to building a prosperous and long-standing business. However, the billing process is complex and requires an understanding of insurance contracts, coding procedures, and claim submissions.
When building out your front-office staff, consider including an experienced billing staff member on the team or outsourcing services. Both options have pros and cons, but having someone experienced and well-versed in the process is essential—no matter your route.
Tax Planning and Compliance
Business owners face their own set of tax advantages and challenges. If you’re considering opening a private practice, speak with a tax professional to learn more about any new potential tax obligations. They can help you understand your recordkeeping requirements, review potential deductions, and keep you compliant with state and federal regulations. Ideally, try to work with someone in the healthcare industry, as they can help you address the nuances of opening a private practice.
Retirement Planning and Benefits
As you move through the process of establishing your private practice, it’s important to still maintain focus on your future retirement. Establishing a retirement plan as a business owner is possible, even if you’re operating as a solo practitioner. Your options could include a SEP IRA, SIMPLE IRA, Solo 401(k), or traditional 401(k) (if your firm is large enough). There are contribution limits and stipulations for each, so review your options carefully with a financial advisor.
Not only does an employer-sponsored retirement plan help you keep your own retirement savings goal on track, but it also serves as an effective incentive for attracting and retaining employees.
Professional Advisors and Consultation
We cannot overstate the importance of seeking advice and personalized guidance from knowledgeable professionals with experience assisting physicians with private practices. Your team of professionals should understand healthcare finance, law, and business consulting well.
Along with a financial advisor and tax professional, you should seek out the help of an attorney and a private practice consultant or coach.
Starting Your Private Practice?
Choosing to open your practice is exciting, as it allows you to serve your patients how you see fit. It offers flexibility, autonomy, and the ability to grow at your desired pace. A solid understanding of the financial details is essential for launching and sustainably growing your private practice.
We encourage you to research the logistics and projected expenses, seek professional guidance, and develop a comprehensive financial plan that can help you set the foundation for a thriving medical practice. Our team specializes in helping physicians optimize their financial well-being, and we’d be more than happy to assist you along your journey. Please feel free to reach out anytime to learn more.
Partners in Financial Planning provides tax-focused, comprehensive, fee-only financial planning and investment management services. With locations in Salem, Virginia and Charleston, South Carolina, our team is well-equipped to serve clients both locally and nationally with over 100 years of combined experience and knowledge in financial services.
To learn more, visit https://partnersinfinancialplanning.com