DENTAL PRACTICE FINANCING
BDBC has direct connections with some of the best dental lenders in the U.S. and we would love to help walk you through the pre approval process. We only refer to banks that have a specific dental loan department, which saves an incredible amount of time and energy. We will guide you to lenders that are most suited to meet your needs. Our goal is for you to get the best interest rate and obtain 100% financing to include working capital and funds to purchase the seller’s accounts receivables. We also work with non-traditional banks that offer financing to dentists with less than perfect credit.
THE 4 MAIN COMPONENTS OF DENTAL FINANCING
Many first-time buyers are confused and often misled when it comes to dental practice financing. I have had buyers state that they have to purchase a practice collecting at least $800k and other buyers have assumed that they need to search for low revenue practices because lower monthly payments will increase their chances of being approved for a loan. Let’s set the record straight ……. the 4 components listed below are exactly what a bank is considering when reviewing a loan application. Keep in mind that there is some flexibility with these components and they are not all set in stone, but this is a great guide for understanding what a dental loan underwriter is looking for.
- Cash Flow: Definition: the amount of liquid funds your new practice will generate after you pay operating expenses and the practice loan. Bankers want to ensure that you will have enough money to pay your practice loan and your personal debts, including your student loans. Generally speaking, this is why low revenue offices (collections under $600k) are harder to finance ……….. there usually isn’t enough cash flow to support your living expenses and your operating expenses. However, there are some practices that generate low revenues, but also have very low expense ratios that do provide an adequate practice. For example, there is a big difference between a $600k office with 70% overhead and 55% overhead. The difference is $180k vs. $270k net income. $180k in net revenue is hard to get financed whereas the $270k is much easier. In my opinion, you should focus on practices with a minimum net income of $250k.
- Liquidity: This is the amount of funds you have that are readily available and don’t require a large tax penalty to withdraw. Examples are checking and saving accounts, stock trading accounts, and cash on hand. Retirement accounts are usually not considered liquid. Banks prefer that buyers have 5% – 10% minimum liquid reserves. This means that if you are buying a $700k practice a bank requiring 5% liquidity will want you to have $35,000 and a bank with 10% minimum reserves will want you to have $70,000 liquid. This is one of the main reasons why I like to discuss financing options with buyers before they start the application process with a specific bank. If you only have 5% in reserves there is no point in wasting weeks going through the preapproval process with a bank that requires 10% liquidity. Important note … most banks will allow a gift from a family member if you are short on liquidity.
- Credit: Almost everyone is familiar with credit scores and knows their score. The banks understand that most young buyers may not have a high credit score or a long credit history. What they are most concerned with is that all accounts on your credit report do not show late payments. If you do have a late payment or two and have a good explanation prime financing can still be obtained. However, if you have had a previous bankruptcy or foreclosure, obtaining a bank loan will be more difficult, but not impossible. There are some non traditional lenders that have programs for buyers with previous credit issues.
- Capacity: Do you have the same scope of treatment as the seller and can you maintain the seller’s schedule? Lenders want to feel confident that you are clinically qualified and that your skills and speed are not too far out of line with the sellers. You don’t have to match the seller’s skill set exactly, but if 20% of the office production comes from endo, implants, and ortho and you don’t have experience with any of those procedures, you may have a problem acquiring financing. Furthermore, lenders prefer to see 2 years of associate experience with personal production reports. They understand that your production as an associate is likely to be lower than your expected production as an owner so that should not be a concern. Note that It is possible to obtain financing straight out of school, but those programs typically require the seller to carry 50% of the loan. The bottom line is that you should be looking for a practice that is providing the treatment that you are currently providing or want to provide in the future.