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- Liquidity includes savings, stocks, bonds, mutual funds and any money you can take out of an account without penalty.
- Retirement accounts, like 401(k)s, IRAs, Roth IRAs, and home equity are not included in liquidity considerations.
- Liquidity is important because it allows you to have a safety net if your practice doesn’t perform well right away or has a couple slow months.
Opening or starting a medical, dental or veterinary practice can be a complex process. Financing that practice can add complexity, especially if you have limited knowledge about the basic requirements needed to obtain a practice loan.
Educating yourself as you prepare for or begin the process can give you greater confidence as you search for the right lending partner. In this article, we break down what liquidity is, why it is important, and how it can affect what you can buy.
What is liquidity?
Liquidity refers to “the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price,” according to Investopedia.
When assessing a doctor’s liquidity for a practice loan, banks consider savings, stocks, bonds, mutual funds, and any money you can take out of an account without penalty.
What is not considered liquidity?
Since liquidity is money that can be taken out of an account without penalty, liquidity does not include retirement accounts, like 401(k)s, IRAs, Roth IRAs. It also doesn’t include any equity you have in your home.
Why is liquidity important in practice ownership?
Liquidity is important because it protects from the risk that the practice doesn’t perform well right away, especially when building a patient base and streamlining productivity and profitability. New practice owners will still have personal and practice bills to pay, so it is important to have cash on hand if needed.
If you only have enough savings to cover a month or two of expenses, you may put yourself and your business in a tough position, and your practice could quickly go out of business.
How does liquidity affect the ability to purchase a practice?
When buying a practice, a lender will consider how much cash or savings the loan applicant has. The more liquidity a prospective practice owner has, the more eligible they are for a larger loan—depending on other factors as well.
How much liquidity does a doctor need before buying a practice?
Banks typically require 10% of the practice price in liquidity. Some banks, like Panacea Financial, look at each applicant’s personal financial statement in more detail to come up with a liquidity number or requirement, based on that individual.
Tips for maximizing liquidity
Especially for young doctors just a few years out of school, it can be tough to have the significant liquidity needed to buy a practice. We see trends in doctors who struggle with having adequate liquidity. Here are some tips that may help you find the liquidity you need to purchase your practice:
- Save your money. When preparing to buy a practice, instead of paying down student or other loans, you may want to save your money. Though your loan balance may be high, banks often prefer to see high debt and high liquidity than low debt and low liquidity. Your lending eligibility often weighs more heavily on cash flow and savings than debt load.
- Balance your retirement savings. Many people put a lot of their excess funds into their retirement accounts, but if you plan to buy a practice, this could hurt your lending eligibility. Because retirement savings don’t factor into your liquidity, keeping more funds in savings and investment accounts may be a better option.
Finding a practice loan that works for you
Liquidity is just one aspect of how lenders assess prospective practice owners, but it is a common reason for financing challenges. If liquidity is holding you back from funding your dream of practice ownership, a lender that can understand your unique circumstances, like Panacea, may be the right partner for you.
We see each lending applicant as an individual and use their personal financial statements to determine a liquidity requirement. If you’re ready to begin the practice ownership process, we can help you start, buy or grow your practice. Start your application today!
We regularly share content that could help you on the journey to practice ownership. To learn more, visit our Resources page, or check out one of our curated articles:
