Ask the Expert: How much debt is too much when buying a dental practice?

Dear Dr. Jerkins: I want to own a practice, but I still have student loans. I hear very different opinions about how much debt a dentist can safely carry. How do I know when student loans plus a practice purchase becomes too much?
— Future Owner

Dear Future Owner: Carrying student debt is not, in most cases, an obstacle to practice ownership.

In fact, there is no single dollar amount where debt suddenly becomes unsafe. The evidence shows that debt levels vary considerably among dental practice owners. What matters most for successful ownership is the cash flow that the practice generates and its ability to comfortably cover expenses, debt payments and the normal ups and downs of running a practice.

What combined debt looks like for practice owners

Among dentists in Panacea Financial’s portfolio, the typical owner carries roughly $400,000 in student loan debt at the time of practice ownership. After adding a practice loan, the typical total loan at closing rises to about $1 million.

It is important to note that most lenders care less about total student debt and more about monthly payments toward those loans. For dentists enrolled in an income-driven repayment plan, monthly payment is often lower than most aspiring practice owners realize.

The cash flow question every owner should understand

Cash flow is the money that goes in and out of your practice on a monthly basis. The core question to answer is straightforward: Is there enough money left after paying normal practice expenses to comfortably cover loan payments and still have breathing room?

That breathing room matters. Dentistry is predictable over the long run, but individual years are not. Running a practice profitably comes down to managing the gap between what you collect and what you spend.

On the revenue side, that means patient volume, payer mix and how efficiently the practice collects what it bills.

On the expense side, the main lever is overhead — staff costs, lab fees, supplies and rent — which in a well-run general dentistry practice typically runs 58% to 68%. Layered on top of that are the variables harder to control: staff turnover, equipment failures and the natural ramp-up period in the first year of ownership.

The nuance of cash flow calculation for practice ownership

The benchmark lenders use to evaluate your cash flow is the global debt service coverage ratio, or GDSCR. It’s a concept that is simple in principle but nuanced in practice.

In the most basic terms, GDSCR looks at what comes in from the practice and your personal income, subtracts the costs of running the practice and your living expenses, and compares what’s left with the total of your personal and practice loan payments.

GDSCR is a comprehensive ratio, but it is sensitive to the way income and expenses are calculated. For example, assumptions about your living expenses or even the timing of financial statements can skew the math, making your financial reality look stronger or weaker than it actually is. That can make the difference between a practice loan approval and a decline in some scenarios.

What many prospective owners don’t realize is that dental practices are not typical businesses. They are unique in the way your personal and practice finances are closely intertwined.

Not all lending models fully capture this dynamic. The best lenders, however, build it into their approach. At Panacea, for example, in addition to GDSCR, we also incorporate a debt-to-income, or DTI, calculation. Think of DTI as a clean, static baseline. It is not affected by tax strategies, personal lifestyle or accounting timing. It simply measures your total debt, including student loans, against your gross income.

Key cash flow benchmarks to keep in mind

As a general benchmark, lenders look for a GDSCR of at least 1.25 — meaning there is $1.25 available for every $1 of debt payments — along with a cash reserve at closing, often in the range of $50,000 to $75,000.

That said, these are guidelines, not strict minimums. The amount of cash you need depends on your personal situation. Dentists with lower personal debt or living expenses may be able to move forward with less, while others may benefit from having more cushion.

Instead of asking how much debt is ‘too much,’ dentists should ask this

Rather than asking whether your total debt number is too high, a better ownership question is: If the practice has an average year — not a perfect one — does it still work financially?

If the answer is yes, the debt is usually manageable. If the answer is no, even a smaller loan balance can feel overwhelming very quickly.

Ownership has always involved borrowing. The goal isn’t to avoid debt but to make sure the practice you buy can support it while still letting you practice dentistry, pay yourself reasonably and sleep well at night.

If you want to learn more you can always reach out to our team at panaceafinancial.com/ada.

Dr. Jerkins is the president and co-founder of Panacea Financial and a practicing physician in Little Rock, Arkansas. Panacea Financial is endorsed by ADA Member Advantage as the exclusive provider of practice financing. It is a division of Primis Bank and insured by the Federal Deposit Insurance Corporation.