One of the first things that physicians starting a private practice need to address before applying for financing is how much money that they are asking for in startup costs. If you’ve never opened a new private practice before, this can seem overwhelming, as there are so many costs associated with running a private practice, and every practice's pro forma and business plan are different. Your lender will typically want to see a projection that covers 1 year. Below, we’ll go into what to factor in when creating a budget for your practice’s first year of operations.
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Practice financing loan resources for doctors
When you need financing for your medical practice, you want to work with someone who understands your industry. For over twenty years, Bank of America Practice Solutions has helped doctors across the nation reach their goals through smart financial solutions1 and expert guidance. Whether you own a practice or are just getting started, they can provide customized financial help for your short-term needs and long-term aspirations.
Purchase and start-up:
Practice sales and purchases
New practice start-ups
Owner-occupied commercial real estate products2
Growth and restructuring:
Improvement and expansion financing
Equipment financing
Practice debt consolidation3
Expert guidance. Personal attention. Real solutions.
To learn more, reach out to Paul Belau, 614.679.5321 or paul.belau@bofa.com.
1 All programs are subject to credit approval and loan amounts are subject to credit worthiness. Some restrictions may apply.
2 For Owner-Occupied Commercial Real Estate loans (OOCRE), terms up to 25 years and 51% occupancy are required. Real Estate financing options are subject to approval and product availability is subject to change. For SBA loans, SBA eligibility and restrictions apply.
3 Bank of America may prohibit use of account to pay off or pay down another Bank of America account.
4 To be eligible for this reduction, applicants must provide association name and membership number at time of approval.
Bank of America is a registered trademark of Bank of America Corporation. Bank of America Practice Solutions is a division of Bank of America, N.A. ©2019 Bank of America Corporation | MAP#3249875
Learn more at bankofamerica.com/practicesolutions
Disclosure: Bank of America is a sponsor of our Private Practice Education Series and partner of ours, which means that we may earn a referral fee if you decide to contact them.
Creating a budget for a new private practice
There’s no magic number that’s the ‘standard’ amount of money that you need to start a private practice, as everyone’s vision of what their future practice will look like will vary. While you may instinctively picture a bright new and modern building with the latest and greatest in technology that provides a luxurious feel for your patients, that’s not always where you start. You need to have a realistic expectation of how much money you can spend and still be financially viable, and how much risk a lender will take on a new venture. Below, we’ll talk about the essentials (and some of the non-essential) things that have to go into your budget, splitting them up into administrative, staffing, and variable expenses.
One time private practice setup fees that you need to account for in your pro forma
One-time expenses to include in your practice’s first year budget include:
Office furniture
Outfitting the office space to make it usable for the needs of your private practice
Equipment purchases
Legal and incorporation costs
Closing costs on any loans or financing
Website creation
Extra marketing expenses beyond your normal marketing budget for the launch of your private practice
Uniforms
Training costs
Related PSG Resources:
Essential administrative items to include in your practice’s budget and business plan
These are relatively fixed expenses that you should be able to budget either monthly or annually.
Rent or mortgage payments
While most physicians start out their private practices by renting a space, there are some that will decide to buy an existing medical office building or even build one from the ground up. Both the costs and the risk profiles for each of these look different.
Related PSG Resources:
Business loan payment for your practice financing
Your overall budget will help you determine how much you need finance, but you will also need to factor your financing into your budget. Business loan payments can vary significantly, depending on the terms and principal balance of your startup loan. Make sure your monthly operating budget can cover your minimum loan payment.
Insurance payments
You will need all sorts of insurance for your business, office space, and practice, including:
Business corporate liability insurance
Casualty
Malpractice insurance
Business renter’s insurance or property insurance
Related PSG Resources:
Equipment leases and maintenance
While you accounted for one-time equipment purchases above for your practice startup, there can be ongoing additional fees for equipment. If you lease some of the equipment versus purchasing it, factor the lease payments into your budget. Equipment will need upkeep over time, so make sure to leave room for maintenance expenses in your budget as well.
Taxes and licenses
How you structure the legal business entity of your private practice can determine how income taxes are handled, but there are other taxes and business licenses you should plan for and budget. These can include:
Tangible personal property taxes
Property taxes on your medical building, if owned
Annual filing fees
Professional services
The amount of staff you hire can drive how many services you choose to outsource, but most private practices will have some outside professional services such as bookkeeping, accounting, and legal services will likely be a part of most private practices.
Related PSG Resources:
Inventory and supplies
There are a variety of supplies required to keep a private practice operating. While we covered equipment above, don’t forget reusable supplies your office will need to keep stocked, such as:
Gloves and masks
Gowns
Disinfectant and hand sanitizer
Tongue depressors
Bandages and gauze
Office expenses and supplies
Along with medical supplies, your office will need to stay functional with:
Office supplies
Postage
Business cards
Also consider higher level operational expenses such as:
Phone and internet services
Utilities
Communication platforms with patients
EHR expenses
Practice management software
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Marketing and advertising
Your marketing budget could include things like planning for a local outreach, website management and SEO fees, reputation management, and more.
Related PSG Resources:
Outsourced services
Depending on your practice, there may be many of these, including:
Laundry and cleaning services
Snow removal services
Landscaping services
Maintenance and repair plans
CME and professional society or local physician organization dues
Throughout our series of how much doctors make by specialty, we’ve noted that around 50%-70% of physicians receive some sort of CME stipend from their employers. This can be a valuable benefit offered to your staff, or you may just need to cover your own CME expenses if you’re running a solo practice.
Membership to professional societies can help provide networking opportunities, which can help your practice grow. Membership can also help enhance your practice’s reputation, especially in the startup phase.
Staffing costs when starting a private practice
These will vary depending on the type of practice and whether you’re running more of a micropractice, a direct primary care practice, or a traditional insurance-based practice. It will also vary depending on the ancillary services you provide, how many doctors or other health care professionals you employ, etc. Regardless, it may include:
Front desk staff salaries
Medical assistant salaries
Healthcare professional (physicians, nurse practitioners, physician assistants, etc.) salaries
Other employee salaries (human resources, etc.)
Health insurance and other employee benefits (such as a 401(k) plan)
Payroll taxes
Related PSG Resources:
Variable practice expenses to budget for
Not all expenses can be forecasted out ahead of time, but they are important to monitor and to include in your budget so that you aren’t caught completely surprised and unable to cover the costs. Examples can include:
Equipment repairs
Meals and entertainment
Inventory and supplies that are not routinely kept in the practice
IT support and office equipment replacement
Don’t forget about your personal budget!
We won’t spend a lot of time on this here, but don’t forget that you are also going to need money to live before your practice starts generating a profit, which can take anywhere from an average of 6-12 months, but may be longer. Make sure that you create a budget that accounts for your mortgage or rent payments, health insurance, life insurance, disability insurance, property taxes, utilities, food, student loans, car loans, medical expenses, children’s tuition, transportation, clothing, vacation, entertainment, and other expenses.
Factor in your significant other’s income or any other active or passive revenue streams if applicable.
You’ll want to consider that all when creating your budget needs for the year and deciding how many months of financing to pursue from a lender. Remember, the larger a loan you take out, the more risk you take and the more interest you’ll have to pay, so this is not the year to live like a king or queen. You’ll want to limit your personal budget as much as possible.
Project your cashflow from your practice
This is where things can get a lot harder for most physicians. It’s very hard to know how long it’ll take before your patient template is full or even just generating enough revenue to cover your expenses. You may not have your contracts with your payors yet to know how much you’ll be getting paid for each visit. You’re still going to need to estimate revenue by generating a forecast of what you expect to generate, that reflects expected patient volume each month and income per patient based on either fees or reimbursement rates from insurance companies (depending on whether you’re cash pay or insurance based).
What if I don’t know what numbers to plug in for my private practice budget?
If you’re having trouble with this, a practice consultant can help. Oftentimes, if your lender finances a lot of private practices like our sponsor above, they may also have access to a lot of data which they can share with you for related comparable private practice startups. You can bet they’ll be referencing that data internally as they underwrite your financing budget request regardless, so they’re generally happy to share with you what they think is realistic.
Additionally, reaching out to others in your field that have done what you’ve done is a great idea. Most private practice physicians (as long as not directly in competition with you in your market) are happy to help other private practices succeed! Feel free to ask these questions on our physician only communities.
Build in some room for flexibility
Once you’ve gone through this exercise, you should have a good idea of at least a ballpark figure of how much money you’re either going to have to save or finance to get through the first year of business while you’re still establishing yourself.
Of course, you know what they say about the best laid plans. Be careful to give yourself some breathing room for the unpredictable or random expenses that come up by creating a discretionary budget.
As you start honing down on the details of each of your services, personnel, and practice location, some numbers will change. You’ll want to keep updating your budget as you go so that you can plan accordingly for the horizon. Track your income and expenses every month and make adjustments to your budget accordingly. Don’t get behind on this, as the last thing you want is to realize that you have a significant cash flow deficit that can’t be addressed in a short period of time. You don’t want your lenders to be unhappy, as they could call in their debt, leaving you in a lurch.
Bring it all together to create a budget to submit to your potential lender for practice financing
After you’ve gone through these exercises, you’re almost ready to take your budget to the lender to make your requests. Congrats! They may have some feedback or tweak your projections based on their own data, but you’ve taken the first step towards getting the financing for your private practice squared away.
Conclusion
Starting a private practice is an exciting time, but also comes with new skillsets you need to master regarding operating a business. A fundamental thing that all practices need is an operating budget. Not only is it helpful for you to see when your new private practice will turn the corner into profitability, but anybody helping to finance your practice is going to want to see budget projections and decide whether they are reasonable prior to lending you money. Compare your projections with others to see if they’re reasonable, and if anybody has any ideas that could save you some money!
Additional resources for physicians in private practice
Explore related PSG resources:
Visit our free educational virtual events for physicians page to sign up for our private practice educational series. You can also find links there for replays of past events.