July 1, 2019 | Last Updated on: April 3, 2023
Deciding to work as a medical professional can be a fulfilling and lucrative career choice, but it can also be an incredibly expensive one. The typical doctor spends 4 years as an undergraduate, 3 or 4 years in medical school, then up to 8 years of further training. For most future physicians, that means years of borrowing money. One doctor recently wrote an op-ed in the New York Times stating that he graduated with $180,000 in student loans, an amount that grew even more after making mere $700 monthly payments during his residency. All that in mind, it’s not shocking to hear that some doctors start off their professional lives with bad credit. But having bad credit isn’t necessarily a career ender. Read on to learn more about the best business loans for physicians who have bad credit.
The first step toward finding the best loan when you have bad credit is to understand the credit score. A credit score is a number created by the Fair Isaac Corporation (hence, “FICO score”) to help lenders determine a potential borrower’s creditworthiness. Your credit score, a number between 300 and 850, is calculated using a number of factors. According to Experian, these include your payment history, the total amount you owe, the length of your credit history, and your tendency to open new accounts. Good credit, generally considered a score above 670, can make your financial life easier. People with higher scores pay lower interest rates on their mortgages and credit cards. They’re more likely to be approved for larger loan amounts with more favorable repayment terms. And because they’re paying less, they’re generally able to move forward with a high score. Bad credit, on the other hand, is usually considered a score lower than 580. Borrowers with a credit rating that low might find that they’re paying much higher interest rates, and they’ll be working much harder to get personal or business loans.
Some new physicians may want to be business owners. In those cases, it’s vital to get a small business loan in order to open a medical practice. And there are tons of loan products available for people with bad credit. Some business loans may require patience – bad credit may be an unavoidable barrier to entry. But there are almost always options for securing a loan if the borrower is willing to accept less favorable terms.
American government-backed Small Business Administration (SBA) loans are a popular option, but SBA loans typically require a high credit score. The borrower will work with a traditional lender, but there’s a key difference between an SBA loan and a conventional one. The SBA will guarantee as much as 85% of the loan total. That guarantee frees lenders to give loans they may not have been willing to approve otherwise. It also means they can offer a lower interest rate. But these loans also come with strict qualifications for borrowers. Borrowers need a very high credit score along with a certain amount of time in business, annual revenue, and more. Because the SBA guarantees are paid with tax dollars, the SBA makes sure those loans are likely to be repaid. If a physician has bad credit and is looking for a business loan, the SBA may not be the best partner purely due to the requirements for the length of time in business and the need for a high credit score.
Another option is a conventional loan through a bank. These work much like SBA loans, but without the government backing. Without that risk mitigation, the lender will likely be even more stringent about the borrower’s credit report. That means a subprime borrower will likely experience difficult loan terms, higher interest rates, and difficulties in repayment. Conventional loans are given by for-profit banks. Those lenders want to make sure they’re earning enough money to make that loan worth the risk. On the other hand, without the government guarantee, there is a certain amount of wiggle room with conventional loans. You may be able to negotiate more favorable terms if you’ve got a strong relationship with your lending officer and can show you’ve got means to repay your debt.
Pretty much every single medical practice needs equipment. Nothing in medicine is cheap, but it’s largely necessary for the practice. Equipment loans could be a perfect solution. Equipment loans are given for the specific purpose of buying a piece of equipment, as their name implies. Lenders will hold the new equipment as collateral. And since medical equipment can be prohibitively expensive, these equipment loans can be great options. Because the new equipment itself is held as collateral, risk is limited for the lender. They may be more willing than other institutions to give equipment loans to a physician with bad credit.
Lines of credit function much like very high-limit credit cards. Your lender offers you a certain limit, say $200,000, and you only make payments on what you spend. So if you purchase a piece of equipment that costs $40,000, you’ll make payments on your $40,000 total with $160,000 still available for future purchasing. A line of credit is a great tool for anyone with bad credit. Because you only pay interest on what you spend, possessing but limiting the use of of a line of credit can provide an ideal safety net when things go wrong. And if your bad credit has led to a higher interest rate, limiting spending on the line of credit means limiting interest payments.
Merchant Cash Advances (MCAs) are fantastic tools for when an emergency springs up at the last second. With an MCA, the lender lends a certain amount of cash to the borrower. For example, let’s say a business receives an MCA of $10,000. The borrower and lender will decide on a repayment amount, not an interest rate, so getting ahead on payments for an MCA doesn’t save any money. For the $10,000 advance, the borrower may agree to repay $12,000 back. And that money is repaid differently from a normal loan. For most MCAs, repayment is done automatically, daily or weekly. The amount repaid each time is a percentage of credit card and debit card income during that time period. Almost anyone can get an MCA. For a physician with a poor credit score, that means an MCA can lead to fast-moving opportunities. MCA money is given quickly – as soon as same day.
Regardless of which type of loan you end up going for, there are certain advantages to being a physician. See, lenders don’t just look at your credit report. No, they also think about your debt-to-income ratio, your career, and your general cash flow. And those factors make being a physician an advantage. While you’ll probably be paying back a heavy student loan debt, the median salary for an American physician is over $190,000 and the demand for physicians is ever-increasing, according to the Association of American Medical Colleges. Borrowers will see that you’re in a high-paying job with great security moving forward. So even if your credit score leaves something to be desired, you’re still an attractive borrower.
But you can still improve your credit, which will make future borrowing much better. Many physicians will become first time home buyers, for example, and it can be difficult to add a home loan to already hefty student loan payments each month. Remember, your credit score is calculated by examining your payment history, the total amount you owe, the length of your credit history, and your tendency to open new accounts. By improving on each of these factors, you can bring up your score.
The most important thing anyone, physician or otherwise, can do to improve their credit score is to simply make every single payment on time and in full. Electric bills, credit cards, student loan payments . . . everything. Any late or short payment can be reported to the credit agencies and bring down your score. But you can use this to your advantage. Think about using one of your credit cards specifically for one regular expense. Gas, for example. If you’re only buying gas with that card and paying it off in full every month, the credit agencies will recognize that regularity.
A tough break for doctors. You’re probably going to owe quite a bit. The best thing you can do here is to make consistent payments on those student loans to bring down the total (and, of course, show a clean payment history like we discussed). You should also avoid new debts unless necessary.
Your score is better if you can show that you’ve been a good borrower for a very long time. So if you got a credit card in college, it’s probably wise to keep that account open. That could even be your monthly gas card, as mentioned above. That long history of payment shows you’re dependable. On the flip side, if you’ve got an older card or account, consider leaving the account open. If you close an old account, your credit history won’t appear as long.
Have you opened or applied for lots of credit in a short span? That can be a red flag for credit agencies, which will see that as financial floundering. Make sure when you open a new line of credit, you’re doing so for the right reasons. If you need to borrow more money, try asking for an increase of a credit limit. That can get the money you need, while also improving your score and not appearing as a new request for credit.
