MIME-Version: 1.0 Content-Location: file:///C:/2683A0B4/debt.htm Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii" Is there a pre-payment penalty

Debt: Personal Vs. Business

By Dale Windsor, Coffm= an Capital Inc.

 

 

When you’re contemplating financing for your practice, the same question seems to always come up. What is the pre-payment penalty on the loan? Although it is a reasonable question, it leads to a more pressing issue. Is all your personal debt paid off? If it is, then the pre-payment issue is relevant. If it is n= ot, reconsider what is actually more important. Should you work to have a debt = free home or have a debt free business? Ideally, both would be great, but this is not very practical.

 

Remember the reason th= at you went into private practice to start with, making the world a healthier place and building personal wealth. Consider the following scenarios.=

 

What if the practice falls on lean times?

 

If your practice is faced with a cash shortage during a slow period, or something has adversely affected your practice inc= ome, you may need to get another loan to help through the slow times. If your personal debt has been paid off then your home’s equity will be a far better asset than the equity in the practice. You can walk into a Bank today and get a no-closing cost home equity loan at around 8.0% in a matter of 2-3 days. It will also probably be tax deductible. On the other hand, a loan or line of credit on your practice may take several weeks to get, will require= you to provide financial information on yourself and your practice for the last three years, and the interest rate will more than likely be at 10% or highe= r.

 

One of the criteria considered when assessing a credit request is personal wealth. Doesn’t everyone ask for a Personal Financial Statement? The higher you personal net worth, the more aggressive= ly you can negotiate a lower interest rate from your lender.  There is an advantage to building = your Personal Equity before building the Practice Equity.

 

What about permanent disability or death?=

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Everyone buys insurance to protect his or her fa= mily against a most unfortunate occurrence such as death or permanent disability= . If either of these were to occur, ask yourself if your family is better off in= a debt free home, or with a debt free practice. My experience with these situations is that the true value of the practice is never realized. Everyo= ne has the “fire sale” mentality. The longer the practice goes not being sold, the less valuable it is. The patients are left to seek care elsewhere. Every day that goes by the practice loses value. Potential buyers know that, and they will use it to their advantage. If you have life or disability insurance, and have reduced the amount of personal debt that you owe, you or your heirs will be in much better shape going forward. Again, t= here is an advantage to building your Personal Equity before building the Practi= ce Equity.

 

The reality is that commercial debt is tax deductible. You will take the interest expense deduction on your tax return= s. You will deduct expenses every month when you prepare the Profit and Loss Statement, and you are only taxed on profits. Consider that your practice c= an be viewed as a car. The car serves the purpose of providing transportation.= It will do so until it reaches the point when you sell it or trade it in. Much= the same way your practice is the vehicle to provide the income to sustain and improve your lifestyle. It will do so until it is probably sold or you reti= re. You should maximize the income it provides to build your personal wealth.