Why Have a Cash Reserve?
Whether you’re considering starting your own dental practice or already have one, building a cash reserve should be top priority, if it’s not already in place. A cash reserve, or emergency fund, allows your practice to weather out the unexpected.
Alternatively, not having a cash reserve can literally destroy your business – as soon as there’s any financial trouble; your practice has no financial padding to rest on until funds come through.
When building a cash reserve, it’s also important to remember that its purpose is literally in case of emergency and that whenever money is taken out, this fund should be rebuilt as soon as finances start looking up again.
Risk vs. Safety
A commonly referenced rule of thumb is that your practice reserves should cover 3-6 months worth of practice expenses. This is a fairly broad but generally applicable statement, though some established dentists may be comfortable with as little as one month’s worth of expenses while others may want an entire year in reserves. Considering something as simple as your aversion to risk is oftentimes a significant factor in how much you ultimately decide to put in your cash reserve.
Obviously, the more money you put into your cash reserve, the less money you have available to allocate to more productive uses, such as expanding your practice and investment opportunities. Evaluating your personality and the stage of your practice will help you determine if you’re going to want money to expand your practice or if you prefer to stow money away. The future is never predictable, but thinking through what your goals are for the future can give you some sense of how to use your money now.
How Established is Your Practice?
Another significant factor when planning your cash reserve fund is evaluating what stage your practice is in. If you have an established practice and have gotten by without much of a cash reserve so far, you may feel more confident because you know what costs generally come up and what you need to be prepared for. While you definitely still need a cash reserve, having an established practice does reduce some of the unanticipated costs that a cash reserve can cover.
If you’re just starting a practice, you may want to plan to have more money in your cash reserve as you are less familiar with the monthly costs of running your practice and because starting any business always involves some unexpected expenses.
Ready to Start Your Practice Now?
While having extra money in reserve when starting a practice sounds like a great idea, realistically, that may not be the best option. If you’re ready to start your practice today and don’t have time to build up a cash reserve fund, there are still options to help you get started:
SBA loans are offered in partnership with intermediary banks. Because the SBA guarantees up to 85% of the loan, banks can offer a much larger amount in loans. The SBA 7(a) loan program is an especially great option for starting a dental practice, as it provides a lot of flexibility and opportunity. While this loan could take several weeks to several months to be approved, the loan amounts can be anywhere from $5,000 to $5 million with interest rates starting at 6.75%.
While many small businesses don’t have great approval success with bank loans, they can actually be a great choice for dentists. Banks such as Bank of America, Wells Fargo, and U.S. Bank even have special resources reserved specifically for dentists. While the specifics of the loans vary from bank to bank, these loans can be up to $5 million and typically have a quicker approval rate of two to six weeks when compared to SBA loans.
Business Lines of Credit
Unsure how much money you’ll need? A business line of credit can be a great option when you might need an extra cash source for the unexpected when starting a practice. You only have to pay back what you take out, and you can continue to use these funds as you keep the line of credit open.
Financing can be a great option when starting a practice, but it should never be used in place of building a cash reserve.
If you’re ready to start your practice now and don’t have the necessary cash reserves, it’s okay to consider financing options to give you the freedom to move forward with your practice, while you work on building a cash reserve. Just remember, while financing can provide needed funds to help get your practice started, you need to have a plan to pay it off and and build the necessary cash reserves you’ll need for the long-term.
Where to go from here?
If you’re ready to start building your cash reserve today, go ahead and calculate your average monthly practice costs and multiply it by however many months you’d like your reserve to last. Decide how much you can put into this account a month and stick with it. A cash reserve isn’t always the most exciting goal to work on, but it’s definitely worth it – you will be thankful later on!
If you have questions about the best way to finance your practice or other specific questions about building your cash reserve, sign up for a complimentary call with Catalyze Dental Advisors today.