Dental practice loans offer dentists access to highly favorable financing, often with long repayment terms, minimal collateral requirements, and no co-signers. Working with lenders that specialize in dental practice financing—and understanding cash flow, credit requirements, and lender expectations—can significantly improve the financing process.
Introduction
As one of the founders of the practice sales industry in California, I can tell you unequivocally that the current lending environment—including the past several years—represents the golden age of healthcare lending, with some of the most lenient and favorable financing terms we have ever seen.
Dental practice lending has “evolved” from Security Pacific’s restrictive rules—30% down, parent co-signers, and five years of practice experience—to our current market, where institutional lenders such as Bank of America, Wells Fargo, and others compete against fast-moving lenders such as Panacea and Columbia Bank to secure a piece of this huge market.
And the reason for this trend is simple: the failure rate on dental loans is exceedingly low. In other words, dentists have some of the lowest charge-off rates of any business classification. Inherent in those “numbers” is the true meaning: transactions DO work, patient and staff retention DOES exist, buyers are successful, and the dentist IS a “safe investment” for the lender.
Thankfully, that is the case. But let’s focus on dental practice loans, potential rates, where to find them, and what to consider before moving forward with dental practice financing.
What Are Dental Practice Loans?
These are lending programs specifically geared toward dentists, with some unique advantages: NO collateral aside from the practice being acquired and/or currently owned; specified lending terms, often including 10-year financing; no prepayment penalties; no co-signers needed; and the dentist’s existing student loan debt is anticipated and is rarely an issue.
These loans are not available to attorneys, accountants, architects, or other business professionals.
They are, however, not available at your local branch!
If you simply walk into Bank of America and request financing, the branch-level staff may not even be aware that their own company has specific departments responsible for overseeing practice loans throughout the country, staffed by experienced lender representatives—and those representatives may not be located in California.
A buyer can easily get turned down for no other reason than not knowing where to go for the loan!
Obviously, this is where a practice broker can help by guiding you to the specific departments within these large lenders and connecting you with the personnel responsible for “practice loans.”
Types of Dental Practice Loans
Loans are available for a variety of purposes, including:
- Buying an existing practice
- Starting a new practice
- Buying into an existing practice
- Expanding an existing practice or purchasing equipment
- Purchasing commercial real estate
Important Considerations Before Applying for Financing
A. Credit Score and Related Issues
Lenders today generally seek the following criteria from applicants before starting the process: a 740+ credit score; no bankruptcy or short-sale history; student loans under $600,000; no other significant debts; two or more years of dental experience; and approximately $75,000 in cash reserves.
Naturally, there are always exceptions, but these are simplified guidelines.
B. Do You Have a Business Plan?
A business plan should cover topics such as practice demographics, growth strategy, staffing concerns, marketing strategy, management philosophy and strategy, a financial plan for achieving your goals, and an open assessment of the risks to the lender.
Here again, you can rely on your broker, Mr. Bermudez, for help. He can direct you to the right lender, speak with the lender on your behalf, present the paperwork in the manner the lender prefers to receive it, and help prepare whatever business plan is needed.
C. Cash Flow
Let’s face it: if you are buying a practice and have received the seller’s financials, you may see that the practice does not “show” a lot of cash flow. That may be because the seller’s accountant has done a good job of sheltering income and maximizing legitimate business expenses.
At the time of the financing request, however, you need to present a scenario to the lender demonstrating that this business, despite showing limited net income on paper, is a solid investment.
Sure, you may work more days, more hours, and offer more services than the current dentist/owner, but that alone is insufficient.
You need to create a series of “add-backs” to the seller’s financials, showing where the underlying net income and cash flow actually lie.
From experience, do not try this on your own. There are several reasons:
(a) The lender may not accept your assumptions.
(b) You may miss certain legitimate add-backs.
(c) Your projections may carry little historical significance with the lender compared with a properly documented list of add-backs presented and supported by Mr. Bermudez, who has more than 40 years of experience securing loans for dentists.
There is no substitute for speaking the lender’s language!
Small Business Administration as a Lending Source
Lastly, let’s discuss SBA loans.
My advice is simple: do NOT go there unless necessary.
Aside from the fees, extensive paperwork, and seemingly never-ending process, SBA-backed financing can involve liens and additional administrative requirements that may complicate the borrowing relationship.
At some point, you may want to refinance or even pay off the loan. Navigating the paperwork required to obtain releases and complete the process can be frustrating, particularly when you do not have a specific representative or staff member taking a personal interest in your situation.
You may find yourself dealing with multiple departments, additional paperwork, and bureaucratic delays. Even when you call, write, involve an attorney, or repeatedly follow up, the process may still take considerable time.
For these reasons, I consider SBA financing a last resort—and even then, be careful and fully understand the terms and requirements before proceeding.
Have Questions About Dental Practice Financing?
If you have questions about borrowing, lender-specific criteria, whether your practice qualifies for financing, or, as a buyer, how much you may be able to borrow, call Lou Bermudez directly on his mobile at 818-519-8564.
You will be impressed by his knowledge and, more importantly, by his willingness to help—with no strings attached.