Getting a loan for starting a dental practice, or buying a dental practice can seem like a daunting prospect, and rightly so. This will be one of the biggest, if not the biggest, decisions of your career. And you have to make it at a point in your professional life when you have the least amount of experience, either in dentistry or in business. That’s the bad news.
The good news is that if you choose the right lender, one who understands dental practice lending, and you’re prepared, it can be a lot simpler that you might think.
Choosing the right lender is the easy part, you just need a reputable bank with experience lending to dentists—that is, one that understands how practices need to be financed. They’re not hard to find. The financial preparation can be the hard part. But it doesn’t have to be if you understand a few things about the practice lending process.
Dental Associate Experience Reduces the Bank’s Risk
How much experience do you need before starting your own practice? Honestly, not much. Lenders report that 60% of dentists seek to set up their own offices within the first five years of their practice. But that doesn’t mean you can just walk out of dental school and into a bank expecting to get a few hundred thousand dollars. While many lenders don’t require much experience (more on the reasons for that below), they will be looking for some experience—at least one or two years as an associate. The reason for this is that most young dentists gain invaluable experience in those first couple of years: working in a real world office with patients from the general public, managing staff, increasing hand speed, and creating a track record of production. There is no real substitute for that experience.
There may be an exception for someone with good dental intern experience, or someone who has worked in a family practice and understands the business and administrative sides of a practice already. But these are going to be the exceptions. This will be reflected in the fact that a bank will typically lend less to someone right out of school because its a riskier prospect. The idea is that time working as an associate reduces the bank’s risk because the doctor has an established record of managerial experience and production. Without this, you’ll have to work much harder to convince a bank to lend to you.
Typical Debt (Including Student Loans) is Not an Obstacle
First, you might think that a few hundred thousand dollars of student loan debt doesn’t seem all that typical, however, you have to remember that we are not talking about lending, generally. We’re talking about lending to a dentist starting out a practice. Given that the average dental student graduates with somewhere between $200,000-$400,000 in student loans, within this demographic, your student loan debt is probably typical. The offset here is that loans for starting a dental practice or buying a dental practice are among the lowest risk loans. The default rates are very low and dental practices generate a high cash flow. This is why banks are willing to loan large amounts to dentists, funding the entire cost of starting up a practice, where in other industries, the borrower would have to invest up to 20% of their own capital.
Given these factors, lenders know that new dentists will have debt. As long as that debt appears to be typical, it won’t be an issue. In addition to student loan debt, its typical for a young doctor to have a mortgage, some credit cards, maybe even a luxury car payment. The concern is not having debt, but whether the debt is excessive and whether the practice that the loan is for is reasonably projected to generate an adequate cash flow to cover the loan repayment, along with the other debts, keep the lights on, and the staff paid.
Credit Risks are Still Credit Risks
While typical debt is not a problem, and while that typical debt can add up to quite a bit, banks are still going to balk if they find red flags on your credit history. Dentists generally have a reputation among bankers as being among the most financially dependable borrowers, however, you won’t benefit from that reputation if your credit history indicates an inability to manage debt. Lenders typically want a credit score in the high-600s. You should be concerned about the following things, if they’re reflected on your credit report:
- A short sale or foreclosure on a home
- A pattern of late or missed payments
- Taking on too much debt
- Excessive credit card debt
- A low asset to liability ratio
Red flags can also appear with the practice you are proposing to buy or build. These can include:
- An expensive build-out
- High costs for remodelling or re-equipment an older office
- A negative trend in the practice’s collections
- A young dentist seeking to purchase a high-end practice (typically, a doctor should seek to establish a practice that can be profitably run at the doctor’s current production and managerial ability)
- Relocation to an area where the doctor has no established community (there is less to keep a doctor there if the practice experience’s problems)
- A poor production record for the doctor seeking funding
- Disciplinary actions
- Probationary periods
Banks with dental industry experience are looking, in essence, at a combination of the doctor’s ability to responsibly run a practice and produce at a level of profitability that will allow repayment of the loan, and whether the practice is worth the amount being asked for. The bank has to be comfortable with both parts of this equation before it will take on the risk of the loan.
Loans Types for Starting a Dental Practice or Buying a Dental Practice
Typically loans for dental practices are 10-to-15-year fixed-payment products. Some banks will offer a 20-year loan, reducing the monthly payment amount. And some offer an alternative to fixed-payment loans, where payments may be low or even deferred during the first months, allowing a new practice to build momentum before starting with low payments which will increase over the first couple of years. The variable-payment loans let a new practice invest in equipment, staff, advertising, and other things needed to establish and grow the business.
Something unique to dental practice loans is they can include money specifically earmarked as working capital. This means that the bank understands that, just as you don’t have 20% of your own capital to invest, you likely don’t have a large cash reserve to keep a business afloat as it operates in the red during those first months. For instance, a typical dental practice loan from Bank of America may include $75,000 for working capital and an additional $25,000 if the doctor wants to bring on a practice management firm to help increase their business training.
SBA (Small Business Administration) loans are often a preferred choice by lenders. SBA loans are guaranteed by the federal government for 75%, greatly reducing a bank’s risk. SBA loans have other because they are loans are designed for small business like the one you are considering. They also are available for ground-up construction, which many conventional banks won’t offer.
Have a Plan
Before any lender is going to work with you, you’re going to have to show them why it’s a smart investment. You need to have two things. First, is a vision for your practice. What will it be? Where will it be? Why that type of practice in that location? And why are you the one to be trusted with it? You should be able to answer any of these questions with thoughtfulness and confidence. This will show you’ve really considered your choices, and that they are being made intelligently and responsibly.
Second, you’re going to need a solid business plan. This is the document that shows what your costs will be, how those costs will bring revenue, and whether that revenue will be sufficient to support the practice, its staff, and repayment on the loan. For more on how to prepare to prepare your plan, read our recent article, “Five Financing Questions to Answer Before Buying a Practice.”
In addition to your business plan, the lender will probably also want to see your tax returns, dental license, resume, production reports, documents which report all of your financial assets and liabilities, demographic information about the location of your practice, and financial records from the practice (if you’re buying an existing one), or any other information they find relevant. Once all of the paperwork is properly submitted, preapproval is typically completed within a week.
We Can Help You Find the Right Practice
Here at DDSmatch Southwest, we specialize in matching the right buyer with the right seller. If you are interested in buying a dental practice in Texas or New Mexico, we can help you find the practice that best fits your vision for your dental career. Contact us today and find out how we can help you.