For better or for worse, debt is a part of life for most private practitioners, whether it’s from purchasing a practice, adding chairs, new equipment, or even just trying to cover the bills and payroll on a down month. In the right situation, strategically taking on some debt is no problem. But there are also many scenarios where taking on debt is a very bad idea and you can find yourself underwater quickly. So this week, Jeff discuss good debt vs bad debt and how to navigate this intelligently as a dental practice owner.
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Questions From This Episode
How does Jeff define good debt versus bad debt for a dental practice?
Good debt generates an adequate return, either a genuine financial return or a real necessity, while bad debt provides little or no return, or pays for something that wasn't actually needed in the first place. He applies this lens to equipment purchases, office expansions, and even patient treatment financing.
What two tests does Jeff recommend before taking on debt for equipment like a cone beam or CEREC?
First, can you service the payment right now out of current revenue, not projected future income? Second, does your current use case, how many scans or crowns you're actually doing today, generate enough revenue to cover the payment? He warns against buying equipment based on hoped-for future demand rather than an honest look at existing volume.
Why does Jeff say adding a new operatory can sometimes be a bad investment, even when a practice is busy?
If the real problem is an inefficiently run schedule, like scheduling patients linearly instead of properly double-booking with a dedicated assistant per room, adding a chair won't fix the underlying issue and won't produce the return an owner expects. He recommends tightening up scheduling first before assuming more physical space is the answer.
What does Jeff say separates a genuine "need" from a "want" when evaluating a practice purchase?
A true need, like replacing a broken autoclave or a piece of equipment required to maintain a practice's standard of care, justifies taking on debt even without a clean financial return. A want, something that would just be convenient or exciting to have, should be evaluated purely on projected return, and Jeff says a lot of newer clients get into trouble buying equipment driven by FOMO rather than an actual need or realistic use case.
Why does Jeff call it a "five-alarm fire" when a practice starts using debt to cover regular operating bills?
He distinguishes this from taking on debt for equipment or expansion, arguing that a healthy small practice should be able to cover its own bills from revenue every month under normal conditions. If a practice is relying on credit just to stay current on bills with no unusual circumstance behind it, he says that needs urgent, immediate attention, since left unaddressed it leads toward bankruptcy.
Episode Transcript
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This episode is about everybody's favorite four-letter word, debt. I'm being sarcastic, in case that wasn't clear. Some people are completely comfortable with debt, while for others, even the idea of being a little bit in debt keeps them up at night. As a business owner, there's a pretty overwhelming chance you're already familiar with taking on debt for something, student debt, practice debt, new equipment, and so on.
There's also this common idea that debt can be "good" or "bad," though how that gets defined really depends on where you're reading about it. Debt, applied to the right situation, can genuinely be useful. But what's the right situation? Is there a simple test, or a couple of tests, that tell us whether taking on a loan or some other form of debt is a good idea, a bad one, or a genuine warning sign? Yes, to all of that, and that's what I want to dig into this week. My name is Jeff Blumberg, and I'm your host.
Quick disclaimer first: I'm not an accountant, not a tax attorney, and not a financial planner. What I'm sharing is what we teach our clients, not formal financial advice, and I'd encourage you to have real advisors you can consult on questions like this, even if you're not employing them directly. Beyond that, you're responsible for your own decisions, apply your own judgment to whatever you take from this.
So how would I define good versus bad debt? From a business standpoint, good debt is debt that generates an adequate return, and I mean that in two senses: necessity, and actual financial return. Bad debt is the opposite, too little return, no return, or debt for something that simply wasn't needed in the first place. Let's dig into this in depth, since I've seen plenty of cautionary tales with newer clients walking into MGE already carrying a lot of debt for things they genuinely didn't need.
Let's start with the financial-return side. Say you want a new piece of equipment, a cone beam, a CEREC, maybe you want to add a new operatory or even move offices entirely. Take the cone beam as an example. You're placing implants and want one of your own. My first question would be: how many cone beam scans would you realistically do in a month? Say the answer is two. If the revenue from those two scans, assuming you're actually charging for them and not treating it like a free extra x-ray, doesn't cover the lease or loan payment on the machine, that's probably not a good purchase. I've also heard the reasoning, "well, if I buy it, I'll use it more," but I'd base that projection on your current use case, not on what you hope will happen after the purchase. I've even seen people assume that simply advertising the fact that they now offer cone beam imaging will cause a flood of new patients to appear. That almost never happens.
So look honestly at your current use case. If two or three scans a month wouldn't cover the loan payment, I probably wouldn't buy it. The same logic applies to any major equipment purchase. Take a CEREC, the appeal is same-day crowns, but remember your own chair time is a real cost too, that's easy to leave out of the math. I've seen practices buy one, and the crowns they end up milling on it actually cost more per unit than just paying a lab would have, since the lease payment outweighs what they were previously spending on lab fees. This isn't a knock on the machine itself, plenty of our clients use CEREC very successfully, it's a knock on buying equipment you don't actually have the case volume to justify. Years back, I heard secondhand, and I'll treat this as more of an industry rumor than confirmed fact, that CEREC actually ran into a stretch where used units were flooding the secondary market because people had bought them without a real use case and weren't using them. If you're genuinely doing 20 or 30 crowns a month that could go through a CEREC, that's a great investment. Same logic applies to a cone beam, if you could realistically be doing 20, 30, even 40 scans a month, the math changes entirely, and taking on some debt to get there makes sense. Machines like these range widely in price, some attachments run around $40,000, standalone units can run $100,000 or more, but if a $100,000 machine is generating $6,000 to $8,000 a month in revenue, it'll pay for itself and then keep producing profit for years after. That's good debt.
The flip side is straightforward: you're not generating enough to cover the payment. I'd apply two tests before taking on debt like this. First, could I service this payment right now, out of my current revenue, not projected future income? If the lease payment is $2,100 a month, do I already have that surplus every month? If yes, go for it. If not, and I'm hoping the purchase itself will generate the money to cover it, I'd advise against it. Keep referring cases out, use a mobile unit or a nearby facility, until either your volume genuinely justifies the purchase, or you already have the surplus funds to cover the payment without needing the new revenue first. That logic applies broadly: if you're taking on debt specifically because you expect it to make you more money, look honestly at your current profitability, can you actually service that debt today? If you could cover it for a month or two out of savings but not beyond that, you're just setting yourself up for a problem a few months down the road. In that case, build up your revenue and profitability first, then revisit the purchase.
Adding a new operatory, or moving offices entirely, is a more complex version of the same decision. Let's take adding an operatory first, cabinetry, computers, a chair, possibly a new x-ray head unless you're already rotating one between rooms. The first question: do I actually need this, meaning, is the lack of that operatory hurting how I deliver care, whether that's quality, speed, efficiency, or income? In a lot of cases, this is a clear yes. Say you're in a six-operatory practice, you're working out of two as the owner doctor, an associate is working two more, and a hygienist has the remaining two, hygiene is booked solid, marketing is ramping up, and new patients are flowing into hygiene. If you're plumbed for eight operatories and want to add another hygienist, adding that operatory is close to a no-brainer, you'll likely spend somewhere between $10,000 and $20,000 depending on what you need, and make that back quickly, both financially and in terms of actually being able to serve your growing patient base.
Now consider where it might be a bad purchase. Say you have four chairs, one and a half hygienists, and you're personally working out of two, and you'd love a third chair "for overflow," mostly because it would be convenient on busier days. In that case, I'd look hard at your scheduling before adding anything. Are you actually running an efficient, properly double-booked schedule, or scheduling linearly, one appointment after another? I've seen people claim they're double-booking with a single assistant, which genuinely isn't possible, your assistant needs to be with you the whole time, so if you're just bouncing between two rooms with one assistant, that's not real double-booking, that's just switching chairs while one room resets. If you think you need a new operatory for overflow, you likely need better control of your existing schedule first, and you won't see the return you're expecting from the new space until that's fixed.
So, in order: can I make the payment, will it actually generate a return, and is it genuinely needed? That third question, need versus want, is worth sitting with directly. If someone on your team pushes for a purchase because "we really need branded toothbrushes," that's not need in any real sense, you need air, food, and water or you die, you don't need a new television or computer, you might want one. So look honestly at whether a purchase will generate an actual return, and if you're taking on debt for it, or frankly spending any money on it, what are you actually getting back? If the answer is nothing, what was the point, unless it's a purely personal expense you can genuinely afford and just enjoy. This is where I've seen a lot of newer clients get into real trouble, equipment they didn't need, bought because of FOMO, fear of missing out, "I need this, it would be awesome, I need that too." New equipment is genuinely exciting, and there's nothing wrong with wanting your practice to feel current, but it has to come back to the actual financial impact whenever real money is on the line.
There are real exceptions, though. If your autoclave breaks, you need an autoclave, that's a genuine need, you can't legally or safely operate without one. If you don't have the cash on hand and need to take on a small amount of debt to replace it immediately, that's completely reasonable, you can't stay open without it. The same goes for instruments or kits genuinely required to maintain the standard of care you've set for your practice. It's similar to how we think about patient treatment: if a patient comes in with real dental problems affecting their ability to chew, with untreated periodontal disease, that's a genuine quality-of-life and even life-expectancy issue, and if they need to take on some debt to get treated, there's not a "financial return" in the traditional sense, but how do you really put a price on quality of life or life expectancy? In that case, it's absolutely worth it. The same logic can apply to your own team: say a front desk employee is completely frazzled, working 65 hours a week, and genuinely needs support. Bringing someone in to relieve that pressure often does show a real return too, in retention of a valuable employee, and ideally in additional production, if I add someone to a specific area of the practice, I'd generally expect to see some financial return within about 30 days or so. If there's truly zero return after adding headcount, that new hire becomes more of a convenience than a genuine contributor, and it's worth asking how their position is actually being funded.
So whenever you're weighing a larger purchase, which is usually when debt actually enters the picture, really examine the expected return and the effect on your practice, and confirm you can service the payment right now, not on some hoped-for future income. If you can't yet, focus on raising profitability first before taking the purchase on.
Moving offices entirely is really an extended version of the operatory decision. First: have you genuinely maxed out your current physical space? Say you're in a three-operatory condo unit with no room to expand, working 35 hours a week, and you're eyeing a move. If a genuinely great opportunity happens to come along, a building at a good price, that might be worth pursuing on its own merits as a potential investment. But worth keeping in mind here, and this is where a lot of people got burned during the 2008 financial crisis and the real estate crash that came with it: real estate prices got wildly inflated, people overpaid, and values then dropped, leaving many owners underwater, owing more than the property was actually worth. A lot of that could have been avoided with a simple gut check. Say you're eyeing a $300,000 condo, with roughly a 5 percent interest rate on the mortgage, monthly payment including HOA fees running around $2,800. Before buying it, even for personal use, ask: could I actually rent this place for more than $2,800 a month, accounting for repairs and upkeep? If the honest answer is that you could maybe get $1,800 a month in rent against a $2,900 mortgage payment, that's simply an overpriced asset, don't buy it.
Applying that same instinct to an office move: first, do I genuinely need to move? I've seen plenty of moves that people later regretted. Second, have I actually maxed out my current space? Take that earlier example of someone in a business-park condo, three chairs, no room to expand, working only 35 hours a week, with no great local real estate opportunity on the table. Before I'd spend, say, $500,000 building out a new office, I'd look at expanding hours first. You're already paying for that space around the clock, even if practice-park rules limit when you can actually use it, so if you're only using it 35 hours a week, there's real room to grow into it further. A split-shift model works well here, not stretching yourself to 60 or 70 hours personally, but effectively running two practices out of one physical space. Bring on a second junior manager and an associate doctor, you work 7 to 2, they work 2 to 7, five days a week plus maybe a Saturday morning, and you're both still working a reasonable 35-hour week while getting real use out of those three operatories.
Once you've done that, hours expanded, both schedules genuinely full and running efficiently, what's next? I'd look at whether there are any insurance plans worth dropping. Dropping a plan typically costs you up to about 30 percent of the patients tied to it, so I'd phase that out deliberately. Once plans are phased out, fees are current and appropriately set, and both split shifts are genuinely full, patients being pushed out weeks in advance, with essentially no managed care left in the practice, that's a genuinely strong, profitable position. At that point, if your physical space truly can't support the volume you're generating, that's when a move or an additional location starts to make real sense. But those are the steps I'd want to see exhausted first, because moving a dental practice isn't like relocating a simple office, you're not just packing tables and an x-ray machine, you're plumbing, equipping, and often leaving expensive built-in cabinetry behind entirely. Before committing to a move, dream office or not, I'd want to know the current space was genuinely maxed out, or that an exceptional opportunity, with its own real estate upside, had come along on its own terms.
So that's good versus bad debt: is there a real return, is there genuine necessity, can you actually service the payment at your current level of business, and is your projected use case based on what you're actually doing right now rather than what you hope will happen after the purchase.
Now, the scenario where debt becomes a genuine red flag. There's a common idea in business that companies are simply supposed to carry lines of credit and debt as a normal part of operating, "that's just what businesses do." Say you start relying on loans, credit cards, or a line of credit just to pay your regular operating bills. If that happened during the COVID shutdowns, understandable, that was a genuinely unique, unpredictable situation. But say it's simply a bad month, or two bad months, you're burning through savings, and now you're tapping a credit line just to cover normal bills. Some people shrug that off with, "well, businesses carry debt and credit lines, this is just a slow period." That's the wrong way to think about it if there's no real extenuating circumstance, no ice storm knocking out power for two weeks, just ordinary business conditions where you haven't made enough to cover your own bills for two straight months and are using debt to bridge the gap. That is a five-alarm fire.
I bring this up because I've seen people treat it with a surprisingly casual shrug, "well, that's what businesses do, they carry lines of credit." You're running a dental practice, not a manufacturing operation that legitimately floats inventory on a 45-day line of credit while waiting on a large client to pay an invoice. That's not your business model. You're a small business that should be able to pay your bills every single month under normal operation. If I ever found myself taking on debt just to cover bills, with no unusual circumstance behind it, or frankly even with one, since that's still not sustainable long-term, I'd treat it as an acute, urgent problem from the very first week or month it happened, not something to let ride. Left unaddressed, that trajectory leads to bankruptcy, you can't manufacture money the way a government can, so bills have to get paid somehow. I'd dig in immediately to understand exactly why this started happening, an underperforming staff member, a marketing vendor not delivering, someone out of the office for weeks with a role left uncovered, there could be any number of causes, but it needs correcting with real urgency, because letting it continue is exactly the kind of iceberg-ahead, train-light-in-the-tunnel situation you don't want to be standing in front of.
We're glad to help work through exactly this kind of situation, and honestly, it's usually not that hard to diagnose once you actually dig in. We offer a free practice consultation if that's something you're dealing with, taking on debt just to cover bills, practicing for more than three months and still not profitable enough, I'll put a link on the episode webpage.
I've also seen debt work out well even in a genuinely tight spot. I remember a client who was doing about $3,000 a month, essentially running on fumes, with roughly $20,000 to $30,000 left in working capital, meaning five or six months before they'd be completely out. They signed up for the MGE Communication and Sales Seminars, which teach doctors how to sell and help patients genuinely want the treatment they need, and it worked, they ended up producing well over $100,000 a month afterward, with immediate jumps of $10,000 to $30,000 a month once they applied what they learned in our Power Program too. The average increase from those seminars runs close to $288,000 a year, so spending roughly $11,000 to generate an extra $300,000 annually is a strong return by any measure. If that meant taking on a bit of debt, and they were able to service it for the several months it would take to see results, that was a reasonable decision, especially since the alternative was simply running out of runway with no real path forward.
Debt, like any tool, is neutral on its own, a saw or a hammer used properly gets you a clean cut or a well-built project, used carelessly, you end up with smashed thumbs and missing fingers. Applied correctly, debt is genuinely useful. Applied carelessly, it becomes a real problem. I hope this helps. If you want to find out more about MGE, you can find us online at mgeonline.com. That's all I've got for you this week, have a great week, and I'll see you at the next episode.