How today’s medical school graduates can start their own practices – even with high student debt

As a health care banker at U.S. Bank, I talk all the time with physicians who want to start their own practices. The question I often hear: Can I get financing to start or acquire a practice – even with all of my medical school debt?

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My answer can surprise them: Yes, they can – if they build a practice the right way, with the right support.

The critical factor is cash flow. When health care lenders are looking to make loans, they are not focused on a student’s total debt. Instead, their concern is whether a practice’s income can cover a physician’s monthly payments. And that is possible in today’s marketplace, especially in growing communities where the demand for medical services is exploding.

To be sure, medical school debt is top of mind as students finish their training and start practicing. The median amount of debt for the class of 2023 was $200,000, not counting undergraduate obligations, according to the Association of American Medical Colleges. Many graduates leave with a significant amount more than this.

Perhaps with this debt in mind, some graduates join a practice owned by a hospital system, private equity firm or other corporate interest when they graduate. However, I still see many young physicians eager to go out on their own.

According to the AMA’s 2022 Physician Practice Benchmark Survey, more than 46% of physicians work in private practices. These physicians like being their own boss, building their own brand, and being able to treat patients the way they think is best. Establishing an independent practice can also be an excellent way to build wealth and support a family over the long-term.

Start-up or acquisition?

For physicians who take this route, the first major decision is whether to start a practice from the ground up or to acquire an existing one. Both have advantages and disadvantages.

A start-up practice launches with new equipment, and the owners can run their operations and treat their patients as they see fit. The major disadvantage, of course, is starting with zero revenue and no existing patients.

Meanwhile, acquiring a practice provides a physician with an existing staff and patient base. But the equipment is used, staff may be set in their ways, and the physicians’ treatment style may or may not mesh with the patients’ expectations. All these factors are important to consider before physicians set out on their own.

The importance of cash flow

The next question for aspiring practice owners is how to finance their start-up or acquisition. This is where the critical factor of cash flow comes into play.

Specialized health care bankers are typically cash flow lenders, meaning they don’t concentrate on the outstanding debt. They look at a graduate’s monthly student debt payments and whether they can be covered by the profit produced by the practice.

In analyzing a potential loan, bankers are looking at both sides of the equation. What are the monthly debt payments a graduate expects to owe? And what are the revenue prospects of a practice? If the income is sufficiently greater than the debt, 100% financing is an option.

On the debt side of the equation, many medical school graduates have been able to make their monthly school loan payments more manageable by using Income-Driven Repayment (IDR) plans offered by the U.S. Department of Education. With these plans, payments are based on ability to pay, rather than the total balance, helping reduce debt payments.

On the income side, a specialized health care lender will examine a practice’s business plan to understand projected revenue and profit. Overall, the outlook for independent practices has been positive in recent years, as more offices are adding procedures and hours, and fee schedules are increasing, particularly for specialties like plastic surgery and ophthalmology.

A report by management consulting firm Kaufman Hall found that net patient revenue per provider FTE was up 4% to $383,881 in the first quarter of 2024 from a year earlier. The report was based on data collected from more than 200,000 employed physicians and advanced practice providers in 100-plus specialties.

This growth in revenue gives bankers confidence that borrowers will be able to meet their business and personal obligations, such as college, home, and auto debt. Of course, there are variables for each individual practice such as location and specialty.

Surrounding yourself with experts

Finally, physicians should consider the terms of their financing before signing on the dotted line and make sure they are working with partners with expertise in health care.

Specialized health care lenders can often provide longer-term financing options – 10 to 15 years on non-real estate loans. These loans require smaller monthly payments, an advantage over the 5- to 7-year loans offered by some other lenders. A banker with expertise in health care can also offer money movement, back-office software, wealth management, and other services that can support physicians as they build their practices.

Besides picking the right banker, it’s important for practitioners to surround themselves with additional experts – accountants, attorneys, and consultants with extensive experience in the health care industry. They can help craft a business plan that maximizes efficiency and revenue so a practice will produce the necessary cash flow to secure financing.

Today’s medical students may be graduating with significant debt, but many health care providers still want to work for themselves, as they pursue flexible schedules, seek to build businesses that can sustain their families, and most importantly, develop care models that best fit their patients’ needs. With the help of a banker steeped in their industry, and the support of other experts, these physicians can be optimistic about obtaining the financing they need to pursue their dreams.

Joe Persichetti is the head of healthcare business banking at U.S. Bank.