Question
I am considering taking out a line of credit for my private practice as a security measure and I have two questions. What is the difference between a secured and unsecured line of credit, and how much credit is sufficient?
Answer
A few bad months can be disastrous for even the most frugal audiologist. A line of credit can help a business deal with revenue fluctuations. It allows the borrower the use of cash as needed without having to take it all out at one time. Even when the economy is down, lenders will support a practice that is creditworthy. One advantage of becoming a doctor of audiology is that lenders usually look favorably on doctors, especially ones that are in a growing field like audiology.
A secured line of credit requires you to post collateral. This is usually in form of liquid assets such as cash, equity in your home, and in some cases it may be stocks/bonds but they are not always accepted since their value fluctuates based on the volatile market. A secured line of credit means you have enough to cover the line of credit should you default.
For exceptional borrowers, an unsecured line of credit may be obtained when the practitioner has a history with the lending institution (and is conwidered a good credit risk). Since an unsecured line of credit does not require collateral, it harder to obtain.
Regarding your question about how much credit is sufficient, generally about three months of expenses should be the minimum requested. In my case, I have a line of credit for $100,000 and have never used it. It is self-renewing with the same bank used for all other business. To calculate three months of expenses, look at all the fixed costs including rent, salaries (but not commissions), taxes, telephone, contractual advertising costs (e.g. Yellow pages, insurance, etc.), and all other expenses that must be paid whether or not the revenue stream is steady. Do not take into account variable expenses such as non-contractual advertising costs, commissions, travel, educational expenses, or any other costs that are not needed for the daily operation of the practice.
The line of credit should be used only when it is necessary to keep the practice in the black or when a temporary drop in revenue occurs. In that case, the loan should be repaid quickly. Thank you for your question, and wishing you much success with your practice!
Granville Y. Brady, Jr., Au.D., F.A.A.A. earned his Au.D. from Arizona School of Health Sciences. He is a licensed audiologist and speech-language pathologist with offices in Clifton and East Brunswick, NJ. Dr. Brady teaches business development and accounting at A.T. Still University. In addition to his clinical experience, Dr. Brady has served as councilman and finance chairman for the Borough of Somerville, NJ and was responsible for the budget, insurance and retirement operations of the municipality. He serves as treasurer of the Audiology Foundation of America.
This Ask the Expert was taken from the course, Managing Revenue Fluctuations - Guidelines for Avoiding Peaks and Valleys, course 15487. To register for the course, click here.
