What You Need to Know About Cold Start Financing

Opening a cold start practice can be one of the most rewarding financial and professional decisions one can make, but most optometrists require financing to make that dream a reality. The good news is that there are excellent conventional loan options specifically designed for cold starts, including:

• 100% financed draw loans
• 15-year repayment terms
• Interest rates currently in the 5% to low 6% range
• Graduated repayment structures, including no payments during the draw period and interest-only payment during the early years of operation

These programs are designed to align with the growth trajectory of a cold start. But what’s the catch? Approval is by no means guaranteed, making proper preparation critical.

Having personally guided more than 350 cold start clients through successful financing approvals, including many who were not initially positioned to qualify, I’ve learned how to maximize the likelihood of approval.

Disclaimer: Every situation is different, and short-term strategies to secure financing may not always align with long-term financial goals, such as paying down debt quickly.

Here are five cold start financing tips to know before applying.

#1. CASH FLOW (RATIO) IS KING

Unlike acquisition loans, where lenders focus primarily on the practice’s cash flow, cold-start financing centers on your personal cash flow ratio (think how much money comes in versus goes out each month). This means lenders typically care more about your monthly debt obligations and expenses than your total debt balance.

For example, refinancing your student loans in order to secure a lower rate and faster payoff could actually hurt your chances of qualifying for a cold start loan if it increases your monthly payment.

Keeping minimum monthly payments as low as possible can strengthen your cash flow ratio and improve your chances of approval. You can still make larger payments to pay down debt faster, as long as it does not come at the expense of tip #2.

#2. LIQUIDITY HELPS MORE THAN (GOOD) DEBT HURTS

Most lenders today want to see approximately 10% of the total loan amount in nonretirement liquidity as a baseline condition for approval. While you aren’t required to contribute those funds toward your project, as is often the case with SBA loans, lenders want to know that you have sufficient savings to cover unforeseen expenses.

With cold-start loans currently averaging around $575,000 for projects that include a full buildout, applicants should generally aim to have about $60,000 in accessible savings before applying.

#3. CREDIT CARD DEBT HURTS THE MOST

Even small amounts of credit card debt can significantly hurt your chances of approval, as lenders may view it as a sign of financial risk and reliance on borrowed money. Carryover balances are also subtracted from your liquidity. To strengthen your financial profile, make sure to pay off your balances in full each month.

#4. INCOME CONSISTENCY IS KEY

Associate income is often required for approval, and paystub consistency is key. While most applicants are working full-time at the time of application, lenders typically want to see that you will maintain at least 2-3 days per week of stable associate income after opening your cold start. These projections are generally based on your current associate role and pay structure.

With that in mind, prioritize consistent base pay when negotiating associate compensation. A predictable income stream is often more valuable to lenders than higher, but variable, production-based pay.

#5. SECURE FINANCING BEFORE FINDING A LOCATION

While it may seem logical to find a location you like, estimate costs and then seek financing, this approach often puts you at a disadvantage in both timing and negotiation power. Securing financing first allows you to know exactly how much money you have available for your buildout, which in turn determines the size of space you can afford and how much tenant improvement allowance you’ll need from a landlord to stay within budget.

In many competitive markets, landlords may also require proof of funding before even considering a tenant. Additionally, lenders often impose rent caps, so obtaining financing first helps ensure you don’t pursue a space that ultimately falls outside of what your loan approval will support.

BONUS TIP FOR SUBLEASE OWNERS

Being a sublease owner can be a great gateway into cold starting, as it allows you to build a patient base and gain early practice management experience. However, many sublease arrangements involve compensation and tax strategies that reduce reported taxable income. While financially advantageous in some cases, it can create challenges during the financing process because lenders prioritize consistent, verifiable income.

To strengthen your application, consider establishing a consistent pay structure—ideally W-2 income—for at least a few months prior to applying.

IN SHORT: POSITION YOURSELF STRATEGICALLY

While no two financing scenarios are the same, understanding how lenders evaluate cold starts can help you make smarter financial decisions before beginning the application process. Proper positioning is not always easy, and you may need to modify your short-term financial strategy to get there. Patience is important as this process takes time, but it should ultimately be viewed as a steppingstone toward your long-term goal of starting your own practice.

Read more on cold start strategies here.