The Dental Practice: Business Foundations Debt Management Dr. Dave Willis Dental Simulations

Debt Rules of Thumb Type of Debt Rule of Thumb Consumer Debt 20% or less of gross monthly income Housing Costs 28% or less of gross monthly income Total Debt Payment 35% or less of gross monthly income

Sources of Loans Banks (Private Banking) Small Business Administration (SBA) Owner Financing Family Members Mortgage Companies Credit Unions Credit Cards Suppliers (Equipment Sales)

Types of Loans Signature Loan Secured Loan Installment Loan Mortgage Note (Promissory Note) Balloon Note Line of Credit

Loan Security Collateral Co-Signer Lien Lien Holder First / Second Position

What Determines the Payment? Principal Amount you borrow Interest Rate Rate you are charged to borrow Term Length of time to pay off (number of payments) Special Considerations

Loan Terms – Principal Amount that you borrow Subtractions from principal Down payment Additions to principal Closing costs Working capital Not tax deductible The value of any asset bought is depreciable The value of supplies bought is deductible

Effect of Down Payment Qualifies you as the borrower Makes you more interested in the success of the venture Your own money is at stake Helps protect the lender from your default Changes your return on investment Leverage OPM (Other People’s Money)

Loan Terms – Interest Amount the lender charges you to borrow money Simple / Compound Interest Interest rate Fixed Rate Floating (Variable) Rate Prime Rate Annual Percentage Rate (APR)

Loan Terms – Term Length of time for a normal complete pay-of of the loan (principal and interest) Match the term to the useful lifetime of the asset purchased Matching Term and Type of Loan Type of Debt Term of Loan Credit Card Immediate Auto Purchase 5 year max Dental Practice 5-7 years Dental Building 20 years Home Mortgage 30 years Education Loans 30 years

Loan Terms – Special Considerations Interest Only Balloon Payment

Loan Terms – Amortization Schedule PV= $100,000 N = 5yr I = 9% Year Total Payment Principal Portion Interest Portion Remaining Principal 1 25,709 16,709 9,000 83,291 2 18,213 7,496 65,078 3 19,852 5,857 45,225 4 21,639 4,070 23,586 5 2,123 (0) $128,546 $100,000 $28,546

Loan Terms – Comparing Term and Rate Annual Interest Rate 8 % 9 % 10 % 11 % 12% 5 yr Note Annual 24,332 24,910 25,496 26,091 26,693 Monthly 2,028 2,076 2,125 2,174 2,224 7 yr Note 18,703 19,307 19,921 20,547 21,183 1,559 1,609 1,660 1,712 1,765 $100,000 compounded loan payment

Financial Planning - Life 101 Effect of Credit Rating on Loan Princ = $150,000 Term = 30 yr Type = Mortgage FICO Int Rate PMT 720+ 5.55 $856 675-699 6.21 $920 620-674 7.36 $1,034 Diff = $138,000 Source: Consumer’s Report

Non-Taxable (Tax Deductible) Interest Debt Consumer Home Mortgage Mortgage on 2nd Home (eg: Vacation) Home Equity Loan / Line of Credit Student Loan Interest Business Business Debt Interest (Including Rental Property) Business Credit Interest Certain Investment Interest

Negotiating with Lenders Be prepared Pro Formas Business Plan Advisors Have co-signers / collateral prepared Check and repair your credit report Negotiate conditions of the loan Loan interest amount / type Use multiple lenders

Monthly Payment on Each $1,000 Borrowed Payment Calculator Monthly Payment on Each $1,000 Borrowed Years 4% 6% 8% 10% 12% 14% 16% 1 85.15 86.07 86.99 87.92 88.85 89.79 90.73 3 29.52 30.42 31.34 32.27 33.21 34.18 35.16 5 18.47 19.33 20.28 21.25 22.24 23.27 24.32 7 13.67 14.61 15.59 16.60 17.65 18.74 19.86 10 10.12 11.10 12.13 13.22 14.35 15.53 16.75 15 7.40 8.44 9.56 10.75 12.00 13.32 14.69 20 6.06 7.16 8.36 9.65 11.01 12.44 13.91 30 4.77 6.00 7.34 8.78 10.29 11.85 13.45

The Dental Practice: Business Foundations Debt Management Dr. Dave Willis Dental Simulations