When practitioners are thinking about opening up their own practice, regardless of specialty or field, there are a couple of concepts for them to consider to make sure that it’s a viable option for them.
Funding The Startup Costs
The first question to ask is “How will I fund my practice?” Startup costs can include the cost of the following: establishing the legal entity, including the filing fees and legal expenses, hiring an employee or contractor, which can include using a third-party to assist in finding that first employee/contractor and finding commercial space, which incorporates the real estate broker, security deposit, first month’s rent, possible construction costs, etc. If the practitioner does not have the funding themselves, the next source would be securing a loan from a bank. However, what happens if you get turned down from a bank?
Alternative Funding Sources
What alternatives exist if one does not have good enough credit — or cannot secure the amount of money needed — to get a loan from a bank? There are other sources of funding, such as an outside investor or a private lender, who may be able to secure a loan, which is less restrictive than a bank but possibly at a higher rate.
If an investor, the investor may want more than just investing in the practice. They may want to be an owner of the practice or have some type of equity interest in the practice. An investor cannot be an owner of the actual practice unless they are licensed to practice in the same field as the practitioner. So if it is a physician’s practice, they need to have a license to practice medicine. If it is a dental practice, they have to be licensed in dentistry.
Generally, investors will provide the necessary funding for the practitioner to open up their practice. They will have a promissory note, where the practitioner will pay back the investment over time, with interest. This is very similar to a bank loan.
However, what happens If that investor happens to be a licensed practitioner in the same field as the practice owner and wants a piece of the ownership of the practice? Before agreeing to anything, the practitioner may want to consider the pros and cons of taking on a partner, especially when that potential partner has invested in the practice.
Items to ask when considering an investor as a partner:
- What percentage of profit or loss will they have?
- How are they going to manage it?
- Will they have voting rights?
- Do they have a right to the day to day decision making?
- Do they have a right to all of the banking information?
- Do they have a right to sign on behalf of the practice or bind the practice to obligations to third-parties?
There are multiple platforms that practitioners can use to help them fund their practice, including traditional bank institutions, private lending, or investors. Each option has pros and cons and before any practitioner makes that final decision, they should take a step back to see what’s in their best interest for themselves as owners of something new, and for the future of their practice.
Stephanie J. Rodin, Esq.
Rodin Legal, P.C.
Tel: (917) 345-8972
Fax: (917) 591-4428