Upgrading your practice with the latest equipment and technology is an important way to stay competitive. But how do you know when it’s time to expand your physical space and whether your practice can afford to invest in additional growth? It all comes down to the flow of your practice. Traffic flow tells you when it’s time to expand, and cash flow is one key to getting you there.

1. Assess traffic flow to gauge the need to expand

There are typically some key factors that lead to the need for an expansion of your physical space. 

Has your client base increased? A successful marketing program, positive word of mouth, or growth in your local population can all lead to an influx of clients. It’s something many veterinarians have encountered recently, thanks to the increase in animal adoptions in 2020 and 2021. If clients are consistently waiting weeks for an appointment, then it may be time to consider expanding your hospital.

Are you offering an expanded service portfolio? Perhaps you need to add a groomer or skin care specialist to your team to stay competitive, but you don’t have adequate space to incorporate these new services. You may want to consider expanding your facility so you can meet client demand and potentially improve your overall profitability, as well.

Is your staff more stressed by the space constraints? Creating a larger facility may also lower staffers’ stress: Having a dedicated break room that’s quiet can work wonders for morale. And a waiting area with better traffic flow and more room between clients and their pets can ease people’s stress and make for happier customers. That impacts staff, too.

2. Assess cash flow before seeking financing

You will likely need a practice loan to complete your expansion project, and cash flow can be one key to attaining a flexible financing package. With a history of good practice cash flow, you can potentially obtain a loan from a specialty practice lender that is based on past performance. 

Make sure you can afford an expansion loan. Here’s a sample cost projection for building a 2,000-square-foot expansion. Your project may be larger or smaller, and actual costs will vary accordingly.

• Leasehold improvements: $180,000
• Soft costs (design, administrative, etc.): $30,000
• 10% contingency fee: $48,000
• Working capital: $30,000
• Equipment and furnishings: $240,000

Total business loan: $528,000

Monthly payment: $5,600 (5% fixed over 10 years) + additional monthly rent

Make sure your practice can manage the debt you are considering. You’ll need to have enough cash to cover the repayment of interest and principal on the proposed debt for the term of the loan. This is called debt service. To calculate debt service, look at these figures for the coming year (or whatever term you wish to consider):

• The adjusted net income for your practice
• Your current practice debt requirements (operating expenses, etc.)
• The additional amount you’d need to pay on the new loan

Now, total both of these debt amounts, then divide your income by the amount of total (prospective) debt. If the result is at least 1.25, your practice is likely able to absorb the additional amount of debt.

3. Choose the best financing for you

To give yourself maximum flexibility in repaying your debt, you may want to look for a longer-term loan with fixed rates and a graduated repayment program.

For example: If you’ve been in your practice for a period of time, a practice equity loan may be one way of financing your hospital expansion. By tapping into the equity you’ve already built into your practice, you may secure a loan that will allow you to complete a build-out of your physical space.