Dental and Medical Counsel Blog

Buying a dental practice generally requires a substantial financial investment. If you are like most dentists, you will need to secure financing to complete the deal.

There are some things you can do to prepare for your first visit with a lender. The lender will have a lot of questions to ask you and this is your opportunity to ask a lot of questions of the lender.

You want to feel a rapport with the lender because you may be working together for a long time. Not just on this initial purchase loan, but for practice loans and other banking ventures in the future.

How to Prepare for Your First Meeting with a Banker

When you meet with the banker and ask for a start-up loan, most bankers will need a ream of documents from you including, but not limited to, the following:

• Completed application packet previously provided to you by the bank.
• Copy of your dental license to practice in the state.
• Your resume or curriculum vitae (CV).
• A personal financial statement including all your assets and liabilities.
• Tax returns for the past few years.
• A business plan.
• Dental production reports from the practice you plan on purchasing.
• Data on how you plan to staff the practice.
• All available financial information about the practice you propose to purchase, specifically information concerning the cash flow.
• Demographics for the practice you hope to purchase.
• Any marketing plan you will bring to the practice.
• Any proposal you have that you believe will increase the production of the practice and thereby increase the cash flow.

Now that you have your paperwork in order, here are some suggestions for questions you should ask the lender.

Questions to Ask the Lender

How important are my credit score and financial history?

If your credit score is lower than 650, you may have trouble securing a loan. Keep in mind that each lender to whom you apply will do its own check of your score. Each application results in a hard credit check. This makes a ding in your credit score and reduces it by a few points. A soft inquiry, which is often done for an overview and background check, but not pursuant to the application itself, does not impact your score.

Pay attention to which type of inquiry the lender makes if you are applying for a loan with more than one bank. A few hard inquiries could end up reducing your score below the 650 threshold. You may want to discuss this with the lender and only have hard credit checks with the lender or lenders with whom you believe you want to do business.

Fortunately, lenders will generally not base their decision on whether to give you a loan or not solely by checking your credit score. Your financial history may be more important. The lender will check your history of repaying debt. Some questions to consider asking yourself include the following. Have your payments been on time? Do you have any defaults? Also, what is your debt-to-income ratio? Have you taken on too much debt?

Is collateral required to secure my loan?

Whether collateral is required likely depends on your credit score, your credit history, and the type of loan you are applying for. The bank may ask you to secure the loan by using personal assets as collateral, such as:

• Equity in your home.
• Equity in your cars.
• Any other assets you own.

There is a risk of losing your personal assets, so think twice and get legal advice before you agree to do this. If you use your home as collateral, and there is a downturn in the economy, you could lose your home and other personal assets due to circumstances that are beyond your control.

Instead of using any personal assets, use business assets and equipment as collateral. For your financial protection, keep your personal and business finances completely separate.

Do you require me to have any specific types of insurance?

Lenders generally require you to have various insurance policies, such as business property coverage, life insurance, disability insurance, and business overhead insurance. Discuss what levels of coverage the lender requires.

Check with your legal team before purchasing these insurance policies. You want to obtain enough coverage to protect yourself in case the worst happens, and you cannot work, something happens to the business assets, you become disabled, or if you die.

On the other hand, you do not want to be over-insured. There is no need to pay premiums for insurance coverage you do not need.

How will my student loan debt impact my ability to get a loan?

Many large lending institutions have special divisions that just deal with dental and medical specialties. They know that most people who graduate from dental school are deeply in debt due to student loans. A banker who has experience with providing dental loans will know this and your student loans should not impact your ability to get a loan for the purpose of buying a practice.  

How does the cash flow of the practice I am purchasing affect my ability to obtain the loan?

You want the banker to heavily weigh the cash flow of the practice you intend to purchase. Evaluating the cash flow will identify problem areas, such as high overhead, or any hidden issues that make the purchase a financial risk. Also, the cash flow is what determines whether you will be able to meet the required monthly payments.

The lender will look at what personal debt you have in addition to your student loans: mortgage payments, car loans, credit card debt, and other monthly obligations. Then, the lender will determine if the practice’s cash flow is sufficient to provide you the funds you need to pay your living expenses, your personal debt, and the practice loan payments.

A senior officer of Live Oak Bank says, “The dental industry has one of the lowest default rates and produces some of the highest cash flow. The combination of those two items is well recognized by banks all over the country, and because of that banks will be more aggressive with their lending to the dental industry.”

Are there banking requirements imposed as a condition for the loan?

Many lenders require you to maintain all your banking needs at their institution. This may include both business and personal accounts. Specific questions to ask in this category include:

• Am I required to conduct my day-to-day banking, both personal and professional, with the lender?
• Am I expected to use the bank for credit card processing? Some banks charge a low-interest rate but counterbalance that with high fees. You should be able to compare rates, both monthly rates, and annual rates. Some banking institutions increase their rates every year.
• Are there any other banking requirements I should know about?

What are the other banking services that are offered?

As the saying goes, time is money. You may want to use the bank for as many services as possible to save both you and your staff time. Ask:

• Will I have access to tools that will help me manage my accounts, such as payroll software integrations for payroll services?
• Does the bank offer investment advice or support?
• Will I be eligible for a business credit card?
• Are there any rewards programs?
• What if I need additional financing to add or replace equipment, for example?

Ask about online banking. You and your staff can save time by banking online. Find out exactly what online banking services are offered.

What are my loan options?

Long-term loans generally are for fixed repayment plans from 10 to 15 years. Some banks may give 20-year loans. Others offer tiered plans where you may make lower payments at the beginning of the loan when you are just beginning in the newly purchased practice with increasing monthly payments as you increase your time in the practice.

Conventional loans are designed to keep the payments low over the term of the loan. This allows you to make other investments designed to grow your practice.

How will payments on the loan be structured and are there prepayment penalties?

Of course, you want to get the best interest rate possible. Be sure you understand the difference between simple and compound interest. This can make a major difference in how much you actually pay the bank over the life of the loan.

You also want a payment schedule that best meets your needs and the ability to prepay the loan. If you have extra money, you want to be sure you can make extra payments and request the extra funds to be applied to the principal. If you sell the practice, you need to be able to pay off the loan without incurring a prepayment penalty.

What is included in the closing costs and fees?

Make sure all fees are disclosed so there will be no surprises at closing. Ask for the closing costs to be itemized so you know how much you are paying in loan commissions, legal fees, and document fees.

Beware: Lenders Look for Red Flags that May Cause Them to Deny You a Loan

Lenders look at the overall package you are presenting them, including your financial and personal life. They also look at the practice you are proposing to purchase.

There are a few red flags lenders may see that will cause them to deny your loan.

• Loan payment track record and amount of debt. One of the most damaging things in your financial history is having a poor track record of repaying debt or taking on too much debt. If you are just out of dental school, have excessive credit card debt, recently opened a couple of new charge accounts, just took out a mortgage for the purchase of an expensive house, and bought a brand-new luxury car, you will not look like a good credit risk.
• Productivity of the proposed practice. If the practice you are purchasing is going downhill in productivity and shows negative trends, the lender may be hesitant to lend you money for that purchase because the cash flow may not be enough to provide for your expensive living expenses and dental practice loan repayments.
• You are relocating. If you are moving miles and miles from your current home to an area where you know no one and have no extended family members, the lender may question whether you will have enough connection to the area to be committed to staying there.
• You are inexperienced yet want to purchase a high-end practice. One lender says that this lack of experience makes the lender question how the new dentist will handle the high level of production needed to keep such a practice afloat. A dentist who has been an associate for a few years, who has contributed to the production level, and who also has management experience, has a better shot at getting the loan than a newbie.

It’s important to remember that not all lenders are created equal, so don’t hesitate to reach out to us if you need help being introduced to the best lenders today. Choosing the wrong lender could cost you thousands of dollars in fees and interest that you shouldn’t have to pay.

Contact Dental & Medical Counsel for Assistance

Obtaining a loan for buying a dental practice is a big step. After you have the answers to your questions about the loan, add up the numbers so you know the total amount cost of your loan and how much you will eventually be repaying. You need to know these figures in order to choose the right lender and make the best decisions for yourself when buying a dental practice.

At Dental & Medical Counsel, we have years of experience assisting dentists with purchasing practices and obtaining practice purchase loans. For answers to your questions, or guidance in obtaining the best loan for your particular circumstances, contact us at Dental & Medical Counsel to schedule a complimentary consultation with dental attorney Ali Oromchian.