A Dentist’s Decision Guide to Revenue-Based Finance Management vs. Term Loans

For dental practice owners in the US, selecting an appropriate financing model is vital. Whether you are planning to start a dental practice or looking to expand an existing dental practice, understanding the difference between fixed interest term loans and flexible loan models is vital. This article will discuss revenue-based loan management and term loans, helping you decide which model is appropriate for your dental practice scenario.

What Are Term Loans?

The traditional way to finance a dental practice is through a term loan. You will get an upfront amount of money that will be paid back in a series of fixed, monthly payments over a specified period. You will also know your payments are going to be the same for the entire duration of the loan.

Benefits of Term Loans

• Predictability when making your monthly payments
• Fixed interest rates create stability
• Helps to budget longer term
• Can be used to finance real estate or larger pieces of equipment

Drawbacks of Term Loans

• Payments do not change with your revenues
• May require collateral or a personal guarantee
• Requires you to meet strict qualifications

What Is Revenue-Based Loan Management

Revenue-based loan management allows repayment to be directly linked to a monthly revenue percentage. So, instead of fixed installments, your payments will vary with the financial performance of your practice. Such a model is gaining traction, especially among fast-growing healthcare companies that are in need of financing solutions that are in line with their growth.

Functioning

• Initially, you get the capital
• Repayments are a percentage of collections from the month
• Months with more revenue will trigger more repayments
• Months with less revenue will trigger fewer repayments

Advantages of Revenue-Based Loan Management

Revenue-based loan management provides the following advantages to dental practices in the United States:

• Payments adjust with revenue to alleviate pressure during slow periods.
• Repayment is based on performance rather than a fixed interest schedule.
• Access to capital without the strain of monthly payments.
• Repayment is more dependent on revenue than on credit score.

Revenue-based loan management would be advantageous for dental practices with fluctuating revenue and for young dental practices.

Disadvantages of Revenue-Based Loan Management

Revenue-based loan management comes with the following disadvantages:

• Repayment is higher than term loans
• Repayment increases during good revenue periods
• Revenue monitoring is necessary
• Dentists should be aware of the variable payments and their effect on their business.

Practice Scenario Comparison

Your practice stage and revenue trends will influence your decision between revenue-based loan management and a term loan.

• Starting New Dental Practices: Typically, start-up dental practices have unpredictable revenue in their first 12 to 24 months, so revenue-based loan management provides a way to lessen the early pressure on payment due to the variable nature of the practice’s revenue. In addition, brokers can help you efficiently compare revenue-based loan options.
• Established Dental Practices with Consistent Collections: Practices that generate predictable collections may choose to utilize term loans as predictable cost considerations; however, they may also use revenue-based loan management to fund upgrades, marketing, or expansion.
• Practices with High Seasonality: Revenue-based loan management helps accommodate fluctuations in seasonal revenue (i.e., peaks and valleys) while you utilize term loans as a constant repayment source that could strain cash flow during periods of decreased revenue.

Cost Structure Comparison

Term Loan Costs

• Fixed interest rate
• Clearly defined amortization schedule
• Possibly lower long-term cost if revenues remain stable

Revenue-Based Loan Management Costs

• Repayment system based on a fraction of revenue
• Not having a predetermined fixed interest rate
• Generally, the total repayment varies with the revenue growth speed

Firstly, when determining the best revenue-based financing, you should compare factor rates, revenue percentage deductions, and estimated payoff timelines closely.

Cash Flow and Risk Tolerance

The decision between the two financing options would depend on your level of risk tolerance. If you are a person who likes to plan things with a certain level of clarity and certainty, then a term loan would be a better option. However, if you are a person who likes to be adaptable and dynamic, then revenue-based loan management would be a better option. It should be noted that revenue-based loan management would only be effective if there is an expectation of increasing revenues.

When Revenue-Based Loan Management Is the Intelligent Choice

Reasons why revenue-based loan management makes sense:

• If you’re starting an entirely new dental practice
• If your revenue keeps increasing every month, but not necessarily in a straight line
• If your practice goes through seasons of receiving patients
• If you want to avoid being locked into a fixed monthly payment

If you need funds very quickly, then revenue-based loan management helps maintain your working capital, but at the same time allows you to further expand on your future goals.

Conclusion

Dental practice financing needs both term loans and Revenue-based loan management equally. Term loans can be a stable source of funds and might be less costly over a period; however, revenue-based loan management is more flexible and correlated with actual revenue generation. Your decision should be dictated by your practice length, income regularity, and willingness to take risks. You can choose a set-up that not only nurtures continuous growth but also makes the practice financially strong by analyzing the cash flow rhythms in detail and getting advice from finance experts.