Financing a Solo Medical Practice, Part 2

This post is a continuation financing a solo medical practice, part 1.

6. Asking creditors to delay payments– my EHR company had startup fees of $10000. They asked for $5000 at time of signing and $5000 when I opened. If my finances were tight I would’ve negotiated it to $3000 at signing, $3000 at opening, and $4000 six months later. I would’ve tried the same for my practice management system.

My lease was structured to have a 10 day move in rent free grace period (which I negotiated to 21 days) as well as six months initial rent free. Of course, this money is baked into higher rents for the rest of the term of the lease- nothing in this world is free. You can try to negotiate with your equipment companies to pay 50% upfront, 40% at delivery and 10% after delivery.

My point is that it doesn’t hurt to ask. You can hem and haw and tell a company you like them more and want to give them your business, but a competitor is offering you extended payments. Tell them you are a startup and while you eventually expect to be successful, cash flow will be tight at the beginning. Ask them to “match” the other company. The worst thing that they can happen is they say no.

7. 401k loans– if you are in the position that you are continuing to work for a practice going part time while starting your practice, you might be able to take a loan from your 401k. You can borrow the maximum of 50% of the 401k value (some plans only count vested funds) up to a total of $50,000.

The disadvantages of this are that if the stock market grows significantly before you repay the loan, then you lose out on the gains. Of course if stocks tank, you could actually come out ahead, but this is timing the market, which is an investment strategy I never advocate. Given that the average annual return of the SP 500 is 8%, think of this as a 8% loan.

The one huge disadvantage of this is that if you leave your job that sponsors your 401k (if your practice gets busy and you leave, or they decide they don’t need you anymore), on termination of employment, you must pay back the loan within 60 days. Have a backup plan to pay back a 401k loan if you choose to go this route. Consider Prosper or Lending Club or even credit cards as a last resort.

Just like with IRAs, 401ks are among the most highly creditor protected assets and are protected if you declare bankruptcy. Again if you are reading this blog and following our advice this is extremely unlikely, but is a reason why you should use other sources of funding first.

8. Roth IRA principal withdrawal– I hope that everyone who is reading this, especially residents, is doing either a Roth IRA, or a backdoor Roth IRA if your income exceeds $118,000 for a individual, or $196,000 for a couple. This can usually be done in addition to any 401ks you contribute to.

I agree with the many financial advisors advocate saving six months of living expenses as an emergency fund. These same advisors suggest putting the emergency fund in a Roth IRA- because the principal amount you contributed can be removed tax free. Any investment gains withdrawn from the Roth IRA would be taxed at your ordinary tax rate plus a 10% penalty, unless you are over age 59.5.

So the stock market SP 500 typically goes up about 8% every year. So if a credit card is 15% then 8 is less than 15, right? Wrong. If you take money out of a Roth IRA, you forever lose the opportunity to put it back in. You’d have to invest the money post tax, subject to the capital gains rate (the advantage of the Roth is that growth is free from capital gains, or any, taxes).

Let’s say you take out $5500 (the annual contribution limit). In 25 years at a 8% return you’d have about $37,000. The capital gains would be $31,500 and the capital gains tax at 15% would be $3900. Even accounting for 2% inflation that’s $2400 in today’s dollars. So if you paid back the $5500 in two years that’s about a 22% interest rate! Even in three years a bout 15%. Sorry, bad idea. Would rather pay 15% on my credit cards.

Furthermore, in most states IRAs enjoy a high level of asset protection- even if you declare personal bankruptcy they are protected. It just doesn’t make sense to

9. Use your 401k to buy stock in your business, AKA ROBS, or rollover for business startups– when starting your medical practice, elect C corporation tax status. Establish a 401k for your business. Then use the 401k to buy stock in your business. Presto, now your 401k funds are available for your startup!

One advantage of this is since the money in your 401k is pretax, there is more money available than if you were to pay taxes and use post tax money.

Before you think this sounds too easy, the IRS has a myriad of rules (Qualifying employer securities, 4975 (d)(13)) pertaining to this; you will have to use a third party administrator to set this up (I read a fee of $5000 online). Additionally the IRS may consider this “questionable” because only one person benefits from this. TPAs often quote ERISA as allowing this, but they often have to apply to the IRS for a favorable determination letter.

Furthermore, if you plan to ever hire any employees, and the sponsor amends the plan to prevent other participants (your employees) from buying stock in your company, then this will probably violate anti discrimination IRS rules in your 401k, rendering your plan in violation of ERISA, making everything taxable with penalties.

Also you are are taxed as a C corporation rather than a S corp. I’m not going to go into the details, but most solo or small practices elect S corp taxation over C corp taxation.

So I wouldn’t go this route- it’s expensive, fraught with possible complications and penalties, and regardless, the stock market value will probably grow faster than your practice’s value over may years.

10. Use cash to fund your startup– this is exactly what I did. As Ho Sun has alluded to in his transformation post, managing your personal finances well makes it easier to start up. I’m the type of guy who saved $10,000 per year even when getting paid a resident’s salary living in the Upper East Side of NYC which isn’t exactly the cheapest place in the world to live.

I can’t agree any more with living like a resident your first few years in practice. I did this for several years and can say it was TOTALLY worth it. As physicians we finish training and start saving for retirement at a later age than most professions, which means we need to save a higher percent of our income to make up for “lost years” of training.

For me, the purpose of saving money is freedom, not acquiring a bunch of fancy stuff that gives me little pleasure. I have a nice car, but doubt my life would be better if I had a Lambo. I have a cool pad, but doubt that I’d be happier if I owned a mansion in north Scottsdale or Paradise Valley. Instead of answering to the man, I’d much rather be the man. If I want a half day off to go hiking no one tells me I can’t do it. And by saving for my startup and living expenses, I was able to achieve this.

Actually I still live on not much above a resident’s salary, but still take international vacations! In our google group we have discussed personal finance, so I’ll publish some of the discussions as future posts. There are already a ton of blogs out there about personal finance for physicians so I’m not going to reinvent the wheel. Some of the ones I’ve read and enjoyed include Physician on Fire, White Coat Investor, Future Proof MD, Wall Street Physician, and Passive Income MD.

Of course, I was probably too conservative and saved up too much in cash (versus investments). If I had put this money in the stock market five years ago and simply taken a 3% loan I would’ve come out WAY ahead. The stock market had done spectacularly since then, but even with the usual bumps and dips and averaging the typical 8% return I still would’ve done well. But it is what it is, I slept better at night and regardless this conservative decision isn’t going to significantly affect my path to financial independence.

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