How to Afford Your Private Practice: Ways to Fund Starting Up and How to Keep It Going Strong by Dr. Chris Stout

Many clinicians while skilled in clinical work, often are not as expert in developing or running a small business, better known as private practice. This post examines the costs and approaches to meeting the expenses that are involved in starting a private practice. Readers may be surprised in realizing what should be considered in calculating the cost of doing business when opening and running a private practice. Likewise, they may be surprised with the options available to them for paying off these expenses as well. Welcome to being an entrepreneur! Many clinicians may not consider themselves entrepreneurs or small (or large) business owners, but they are. Many healthcare providers may not have academic training or any prior experience 1

in business operations, management, budgeting, marketing, contracting, or the other myriad of associated aspects of running a practice. But regardless of this, in order to be successful and sustainable in their work of helping others, they will need to. And arguably, the most critical aspect of establishing and running a practice is the financial. Maintaining a practice is predicated on being able to earn as much as it costs to provide the service(s), and maintaining a livelihood predicated on being able to make a profit. If a clinician cannot breakeven vis-à-vis costs of operation and fees collected, he or she will go out of business at best, and bankrupt at worst. If a clinician cannot make a profit, then he or she will need another form of income for financial support (via a spouse/partner, a trust-fund, a “day-job,” etc.). What is it going to cost? Herein the authors will assume that you have already passed your licensing exam to practice. We strongly encourage readers to consider including any student loan indebtedness as part of the expense-of-doing business in calculating your monthly costs. What follows is a list of items to consider (Stout and Grand, 2004). Please note that the list is not necessarily comprehensive and you should add additional items idiosyncratic to your practice’s need. List your monthly costs as follows. OFFICE SETUP Rent (consider security deposit as additional costs at startup, but just list monthly): Utilities: Furnishings (divide startup cost by 12 months to calculate monthly amount, maintain on ledger until paid in full): Telephone service and equipment: Answering service/system: Business stationery (divide by 12 months to calculate monthly amount): Office supplies (monthly average): Marketing costs: (estimate and divide by 12 months to calculate monthly amount): TECH Computer (divide startup cost by 12 months to calculate monthly amount, maintain on ledger until paid in full): Software (divide startup cost by 12 months to calculate monthly amount, maintain on ledger until paid in full): Internet /Wi-Fi: Wireless phone: Website domain (divide startup cost by 12 months to calculate monthly amount): Web site design (divide startup cost by 12 months to calculate monthly amount, maintain on ledger until paid in full): Web site hosting and maintenance: 2

$__________ $__________ $__________ $__________ $__________ $__________ $__________ $__________

$__________ $__________ $__________ $__________ $__________

$__________ $__________

INSURANCES Liability insurance (divide by 12 months to calculate monthly amount): Other insurance(s) (General liability, Fire, Disability, Health, Life, Renters, etc., divide by 12 months to calculate monthly amount): OUTSIDE FEES Attorney fees (divide startup cost by 12 months to calculate monthly amount, maintain on ledger until paid in full): Annual incorporation fees (divide by 12 months to calculate monthly amount): Consultant fees (divide by 12 months to calculate monthly amount): Accountant fees: (divide by 12 months to calculate monthly amount): Office expenses (e.g., photocopier lease, cleaning service, etc.): Secretarial services: Billing services: FEES OF THE PROFESSION Professional dues (add all and divide by 12 months to calculate monthly amount): Books (estimate all and divide by 12 months to calculate monthly amount): License renewal costs (divide by 24 if you pay this every other year): Subscriptions (add all and divide by 12 months to calculate monthly amount): Continuing education (include parking, tuition/fees, travel expenses): Networking and business entertainment costs (estimate): Student Loan(s): DEDUCTIONS State taxes (divide by 12 months to calculate monthly amount): Local taxes (divide by 12 months to calculate monthly amount): Federal (divide by 12 months to calculate monthly amount): Retirement funds (SEP, Roth IRA, etc.): (estimate and divide by 12 months to calculate monthly amount):

$__________ $__________

$__________ $__________ $__________ $__________ $__________ $__________ $__________

$__________ $__________ $__________ $__________

MISCELLANEOUS Supervision: Commuting costs (Train, Parking, Tolls, Gas, Car payment, servicing, insurance):

$__________ $__________

TOTAL:

$__________

Note: This list does not include any expenses for political contributions, clinical materials (such a test kits, forms, etc.), wireless phone handset cost, business application fees (such as “Doing Business As” (DBA) notice, service marks, incorporation costs, etc.), or any other specialty equipment/materials (e.g., neuropsychological test equipment, biofeedback equipment, etc.). How do I compare…? 3

I thought it may be of interest for readers to see how your expenses compare to a small, unscientific poll of practitioners from around the United States. I sent out a quick survey to the List Serves of the American Psychological Association’s Division 42 (Independent Practice), the Illinois Psychological Association, and some practitioners I knew. Twenty individuals responded. My assistant and I found that expenses varied dramatically from practice to practice. For instance, a suburban home practice or an urban practice that shares a building with other businesses can significantly cut down on rent costs. On the other hand, a practitioner in the city may choose to pay more for rent, so long as amenities like quality library access, internet access, secretarial services, mail service, a faculty lounge, or office machinery are included in the cost. Some practitioners strike up creative rent agreements – for instance, one respondent pays $15/hour for rent, only pays for the sessions she has, and agrees to pay $50/month if no sessions are scheduled. In addition, over half of the respondents said that utilities like heat, electric, and water are included in rent. Phone costs also varied considerably. Some practitioners use their personal cell phones and attribute half of its cost to the business. Others use a free Google voice number and have calls forwarded to their personal cell phone. More costly options include a combination of separate phone lines, multiple landlines (up to four or five), private voicemail, and answering services. While over half of respondents do not have employees or contractors to factor into their budget, some practitioners choose to hire bookkeepers, technicians, secretaries, or additional clinicians. The cost of these workers could be as low as $2400/year or as high as $30,000/year. Other costs include software, office supplies, marketing, parking or transit, training, testing materials, subscriptions, website maintenance, and donations. Any surprises? Those responding were primarily from the Midwest and in suburban and/or urban locations, so rents and the like will certainly co-vary as a function of that. The average number of years in private practice was about 19, ranging from less than one year to 35 years. The mean length of time in practice of this group was 15.5 years, ranging from one year to about 35 years. More on this group’s experiences below, but let’s return to your costs of practice. Do the Math: Is Your Business Viable? Next, calculate the sum of the above applicable items. This total will be your Practice Costs, or PC. Use these formulas to calculate your Hourly Cost. Note, this is the COST of doing business, not what your fee or cost to your patients is. (X clinical service hours) x (Y number of weeks worked annually) = Total Annual Hours Worked For example, (30 hours worked per week) x (48 weeks) = 1440 Next, (Total Annual Hours Worked) x (80% [based on -20% for bad debt, missed sessions, etc.]) = Total Billable Annual Hours For example, 1440 x 80% = 1152 So, (Practice Costs)/(Total Billable Annual Hours) = Hourly Cost

Hypothetically, if PC = $95,000, then $95,000/1152 = $82.47/hour. Thus, in this case, it costs $82.47/hour to deliver that hour of therapy. In other words, assuming you have annual practice costs of $ 95,000 and you plan to work 30 clinical hours per week for 48 weeks per year (figuring four total weeks of vacation). In this hypothetical that would be 1440 billable hours worked, minus 20% for bad debt, missed sessions, etc., equals 1152 revenue generating hours annually. This suggests that roughly to cover your annual costs, you need to generate at least $82.47/hour. If you add a modest 5% profit margin it becomes $86.59/hour, or $90.74/hour for a 10% profit margin. Of course, adding more hours worked (either more hours per week or more weeks per year) can reduce the Hourly Cost figure, or could perhaps allow for a greater margin of profit. In better understanding the relationship of cost and productivity, one can more clearly understand how those with busy practices, low practice costs, and sufficient fees can do very well, versus those with high overhead costs, few service hours, or anemic payments. So how do you finance your startup practice? There are a number of options available, but perhaps not all are a good fit and, frankly, not all may be available, as one colleague noted regarding her experience in the early 1990s: “I tried to get a small business loan but was told that I didn’t have established credit as a business, although… had an LLC, a license, a registered name, colleagues that I shared an office with who could vouch for me, and established income. My understanding at the time was that I couldn’t get the loan because I was a ‘woman’ just starting out in practice. That’s what the loan officer told me.” From our sample of respondents, we learned that they initially financed their practice’s startup by: Personal savings Combination of personal savings and credit card Equity from a whole life insurance policy that had been given to me when I got married, that I repaid within a year. Loan from family member

78 % 11 % 5.5 % 5.5 %

We also asked if there were any expenses that were a surprise. We found that a few unexpected costs were licensing and credentialing (if you hire a company to do it for you), continuing education, computers and software, toys and books, lack of corresponding revenue increases due to managed care, accounting services and tax preparation, commercial enterprise pricing (as opposed to residential pricing), and furniture costs, which can be as much as $2000. The group also individually identified their greatest difficulty in getting their practice started. Interestingly, the majority of respondents noted that getting clients and a steady referral base was their most difficult hurdle in getting started, but others said that it was finding office space, creating a business plan/infrastructure, charging clients and collecting fees, dealing with the anxiety of leaving what’s familiar to start something new, and even patience (and boredom!) when dealing with the growing process. 5

Our last question was to learn, if they could go back in time to when they first started their private practice, what would they do differently? Several said that they would invest in marketing by developing a niche, advertising in Psychology Today, being involved in the community, and creating a website immediately. Others focused on networking and recommended collaborating with other professionals, finding quality partners with good business sense and an entrepreneurial spirit, or asking a friend for guidance through the process. Still others emphasized the business aspect of the practice and said that they would hire a manager, learn about accounting or when to pay themselves, spend less time trying to get referrals from physicians, and adjust as the industry adjusts. More advice focused on cost-savings, and the respondents said they would have liked to have known that cell phone bills are tax-deductible, to join a cost-sharing group, to buy more affordable furniture, or to opt for a smaller office where rent is cheaper. (Au Note: These considerations of some of the expenses discussed are absent the pandemicâ&#x20AC;&#x2122;s impact on in person versus telehealth approaches. Thus, some expenses may be able to be mitigated or completely eliminated.) Where to get money to start your practice There are many sources of capital available, from banks, to life insurance companies to even crowdfunding. Each source has its advantages and some are better suited to specific financing needs than others. You should assess your options to choose the most appropriate financing source that you can qualify for and feel most comfortable with. What follows are some avenues to consider. Loans (Debt Financing) There are several types of institutions that provide debt financing (i.e., they loan you money and you are obliged to repay it, with interest). These include: 1. Commercial banks 2. Leasing companies 3. Thrift institutions 4. Life insurance companies 5. Commercial finance companies 6. Other sources (loans from relatives, SBA, crowdfunding, etc.) 1. Commercial Banks. Short-term credit from commercial banks is an extremely popular source of financing for all types of businesses, including mental health practices. In recent years, some banks have set up professional divisions with personal bankers who are experienced in meeting the needs of healthcare providers. Bank borrowing may be the least expensive source of debt financing for secured and unsecured working capital loans, equipment loans, and real estate loans. A practice may develop a relationship with a local commercial bank that assists in the practice's financial planning process. Larger, group practices may fare better with qualifying for such a loan. Short-term loans offered by commercial banks have several unique characteristics. 6

• They are usually extended for a period of 90 days or less and may be secured or unsecured, depending on the amount of risk the bank faces. • When a bank loan is secured, the lender normally executes a security agreement in which the practice pledges a certain business asset as collateral. • A practice may pledge is its accounts receivable (billings to clients and third-party payers for services rendered but not yet collected) as an asset. The amount in accounts receivable is an asset that represents money owed to the practice. • A commercial bank may also require your personal guarantee based on your personal assets. • If the practice does not pledge any collateral against the loan, the bank may extend the loan on the practice's full faith and credit. 2. Leasing Companies. Leasing has become an increasingly popular source of debt financing. Almost any type of property can be leased: • Computer systems • Equipment • Furniture • Office space As an alternative to normal debt financing, leasing offers you greater flexibility and convenience because the lessor (the institution, usually the bank, holding the lease) takes on some of the responsibilities of ownership, including maintenance and disposal. If you are reluctant to borrow, leasing can be an attractive alternative. The interest rate on the lease will most likely be somewhat higher than a loan extended by a commercial bank because the lessor assumes greater responsibility. Commercial banks and financial services companies are among the institutions that offer lease arrangements. 3. Thrift Institutions. Thrift institutions include savings and loan associations, mutual savings banks, and credit unions. These institutions have traditionally been a source of debt financing for borrowers purchasing homes or durable goods. These organizations were deregulated in 1982 and have become an alternative way to finance professional practices, office buildings and equipment. Practices seeking debt financing from thrift institutions can expect an environment and terms similar to those of commercial banks. Thrift institutions offer a wide range of services, such as: • Leasing • Credit cards • Electronic funds transfer • Commercial lending 4. Life Insurance Companies. Life insurance companies offer limited financing to healthcare practices in the form of secured real estate loans. Some healthcare buildings are financed by mortgage loans granted by insurance companies. Low-cost loans are also available from life insurers based on the cash value of a provider's life insurance policies. 5. Commercial Finance Companies. These are an alternative source for borrowers with highrisk credit ratings. These companies generally finance credit sales as well as provide funds for 7

short-term purposes. They borrow large sums from investors and bankers and then lend them directly to businesses. As a result, their interest rates will almost always be higher than banks, thrift institutions, and life insurance companies; and the terms of the loan reflect the borrower's risky credit rating. Examples of these terms would be: â&#x20AC;˘ Minimum cash balance requirements â&#x20AC;˘ Collateral requirements, including personal assets â&#x20AC;˘ Remedies for the finance company in the event of default Commercial finance companies also provide other services, such as financing and factoring accounts receivable. Because your accounts receivable can be fairly accurately valued and are usually easily converted to cash, they are suitable assets to pledge. As accounts receivable are collected, the indebtedness is reduced. When the full value of the receivable is not pledged, collections made in excess of the borrowed amount are returned to the practice. Receivables may actually be sold to a financial institution. Commercial finance institutions prefer the sale be made "with recourse," meaning the risk of the account remains with the practice. If the accounts receivable are purchased from the practice without recourse, the process is called factoring. When a lending institution factors receivables, it assumes the credit risk and the service is more expensive to the practice. Usually, a factor charges a performance commission on invoice amounts and interest at a 3% to 4% increase over the prime lending rate. The advantages of receivables financing are obtaining funds quickly and having a more rapid cash flow. Factoring shifts the risk and inconvenience of credit collection to the factor, but both these practices are costly and may make the practice appear to be financially unsound and risky. Selling receivables is not advised unless you are making a large one-time repayment such as an IRS bill or working out a plan to recover from a not-too-fun catastrophic event such as a natural disaster. Providers who sell their receivables to cover monthly operating expenses are borrowing against their own future. It is like borrowing against next month's paycheck to pay this month's bills. Once you have selected a bank, consider consolidating all accounts, including personal, business, savings, and pension accounts. By increasing the volume of business you offer the bank, you will increase in importance from the bank's perspective. This may result in preferential treatment for services or more favorable loan terms. Establishing a strong relationship and staying with a bank that provides superior service may be a valuable resource for you and your practice. 6. Other sources Credit cards Some of those in our survey noted running up a tab on their credit cards. This high risk and high interest cost, and is not recommended. Family/Friends Loan This can also be risk-laden and may run the risk of damaging important relationships if payments are late, or unexpected difficulties arise. If this route is chosen, it may be a wise idea to have a clearly articulated contract drawn up and certainty that both parties very clearly understand and agree to the terms before executing it. 8

Small Business Administration Loan An often-overlooked route for finding a loan is to go through the U.S. Small Business Administration (SBA). The SBA offers a variety of loans, including a general loan and an equipment/real estate loan, both of which are available to medical facilities like hospitals and clinics. For example, Dr. Steven Solomon of La Jolla, CA, provides intimacy therapy services to couples. He applied for an SBA 7(a) loan and was approved for $100,000.00. He used the funds for computers, equipment, and training. Crowdfunding Some mental health providers who want to start their own private practice have turned to more modern routes to obtain financial assistance. Within the past decade, crowdfunding has increased in popularity. While a private practice is the typical crowdfunding benefactor, we found that individual providers have raised as much as $4,000 using crowdsourcing websites. It seems mental health providers tend to use gofundme.com as their crowdfunding website as opposed to others, such as indiegogo.com or kickstarter.com. For example, a Marriage and Family Therapist in California with a goal of raising $6,842, has raised $950 in six months to go toward her private practice that would aim to serve veterans and their families. She specifies that donations would go to rent, a computer and a printer, and telephone service for six months. A mental health therapist in Bellevue, WA, has raised $1,299 of $7,000 in 14 months. She wants to help members of the LGBTQ community and she indicates that donations will go to licensing costs, business cards, office space, professional organization fees, a website, insurance, and a business license. She wants to raise enough funds to cover expenses for six months as she builds her client base. A professional counselor in Brainerd, MN raised $1,230 of $2,700 in 16 months. Her goal is to start a private practice to help people experiencing anger, anxiety, and depression, among other things. She also offered counseling sessions to donors as a “perk” or a “thank-you” for their assistance. A psychotherapist in Portland, OR who had already begun her private practice, raised $675 of $2,000 in 14 months. Her goal was to pay off expenses like overhead costs and student loans as she continues to build a client base. Finally, a counselor in Guaynabo, Puerto Rico raised $4,300 of $5,000 in eight months. Her goal was twofold: to help people recover from trauma and to mentor students, graduates, and professionals in order to raise the standards in that geographic area for the profession. How lenders evaluate borrowers Lenders make decisions about loans based on their knowledge of the borrower and the business. You will make a positive impression on the lending officer with a well-prepared and complete set of informational documents. The principal document used to indicate your creditworthiness is the business plan. Websites such as BizHumm offer free templates Another key factor in the loan process is the lender’s impression of your credibility. The lender gains this perception from face-to-face contact with you (and your associates if you have them) 9

and with the information provided to support the loan request. If you are borrowing funds for the first time, you can expect to provide more information to the loan officer than if you have a credit history with the bank. Once you have established credibility, you must work to maintain it. You must continue to produce results that are consistent with your business plan objectives and financial projections. If you repeatedly return to the lender for expenses that were not properly considered in the business plan, you will decrease your chances of getting favorable terms. Bank of Americaâ&#x20AC;&#x2122;s small business healthcare loans, doctoral-level psychologists, licensed clinical social workers, and licensed clinical professional counselors are not eligible for this loanâ&#x20AC;&#x201D;only MDs were. Furthermore, CitiBank also has a loan for healthcare professionals starting their own practice, but it is currently geared toward physicians. Of course, if you are a MD, this would not be a problem. If you are not, a strategic approach may be to partner with a MD. But such an approach must be considered in a context of other practice aspects, not solely for access to debt financing. Key information for loan applications Lenders consider three essential items when deciding whether to lend money: 1. How will the funds be used? 2. How much money is needed? 3. How will the money be repaid? The data needed to answer those questions will depend on several things: 1. Your previous relationship with the bank 2. The purpose of the loan 3. The amount of the loan 4. The percentage of total expenditure being sought (for example, a practice borrowing $5,000 to purchase office furniture valued at $15,000 is borrowing only 33% of the total expenditure, which will be more favorably considered than a loan request of $12,000 for the same purpose). Different banks require different levels of detail. For example, if a sole practitioner or a group with less than three providers applies for a loan at a local bank, the lender may rely more on personal financial information than on the practice's operating information. On the other hand, if a large practice is financing real estate or a series of capital projects, the institution may require a projected or pro forma financial statement showing the capability of the practice's operations and ability to repay the debt. Therefore, it is important to have as much information as possible going into the process. 1. How the funds will be used. You may want to borrow funds to finance start-up or expansion. When you are starting or expanding a practice, you may need money for working capital, to purchase equipment, and to pay for improvements to the office. The lender needs to know how the funds will be used so the bank can obtain a security interest if property and equipment are being acquired. If the funds are to be used for working capital, the bank will require some other form of payment assurance. Knowing how the funds will be used also helps determine the 10

interest rate and term of the loan. For example, the term of a loan to purchase a computer system would probably equal the useful life of the equipment. 2. How much money is needed. The size of the loan depends on several factors. a. Determine the total planned expenditures and the amount that will be financed. This relates to the planning process as discussed earlier. You may invest some of your own funds and borrow only a portion of the total. b. Include the expenditures in the business plan developed to support the loan application. This pro forma business plan shows your future needs as well as the level of debt you can repay. c. The bank must understand how the loan relates to your strategic plan. For example, if you are adding providers and need $100,000 to expand, will that amount be used for working capital and improvements? Will another loan be required for related issues? You may find it easier to repay excess funds than to obtain additional funding if the size of the first loan is insufficient. 3. How the loan will be repaid. You will be expected to demonstrate to the bank your ability to repay the loan. The main evidence is your business plan, which illustrates the ability to repay the debt from projected income in excess of expenses. You may also need a contingency plan showing what steps you would take if the financial projections proved incorrect. The contingency plan may indicate a source of repayment other than practice income, such as a guarantee based on your personal assets. Conclusion Healthcare providers who want to start a private practice are not just clinicians. They are entrepreneurs. As such, they must consider the details of business management. They can no longer merely be occupied with the question, “Will my patient recover?” Rather, they must also consider, “Will my business succeed so that my patient can recover?” As you mull over the beginnings of your private practice, calculate your expenses, and explore your options for paying them off, remember that this chapter is only the beginning of the resources available to you. Au Note: Thanks to Gracie Wang for her help in this paper and research, and sections are derivative from two of the author’s books. Paperback versions are available via Amazon Getting Started In Private Practice and Getting Better At Private Practice. PDFs-on-demand for Getting Better at Private Practice and Getting Started at Private Practice are also available along with free sets of slides on practice development and general business startup information that may be of interest. #

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