Purchasing a dental practice that is already set up generally is a quicker and safer option than when you decide to begin your own. However, you will require quite a bit of financial assistance to do so. Obtaining financing for this purpose is accomplished through dental office loans. When preparing to apply for a loan, you need to understand how lenders will evaluate both you as the borrower and the practice itself in order to put together a strong loan request and negotiate better terms.
Types of Dental Office Loans Available for Practice Acquisition
When deciding on a source of finance, dentists need to investigate established options in order to acquire an existing dental practice.
1. SBA Loans
The Small Business Administration backs loans for dental practice acquisitions. Lenders who are approved by the SBA can provide the required funds via dental office loans. The SBA backs a percentage of the loan in case of default, thereby reducing the lender’s overall exposure to risk. Dental practitioners have the option of acquiring an established practice with the help of either an SBA 7(a) or an SBA 504 loan program. An SBA 7(a) or the “504” program can provide the necessary funds to purchase an existing dental practice, refinance current debt, fund working capital for a practice, or ultimately purchase commercial real property.
2. Traditional Bank Financing
Conventional dental office loans remain the primary choice for borrowers with a solid credit history and a well-established financial position. Banks will typically offer relatively low-interest rates and offer tailored repayment plans for purchasing a dental practice. However, this type of financing will generally require extensive financial documentation, very good credit scores, and proof of sufficient income from the purchase of the dental practice so that the loan can be repaid.
3. Online Lenders
The popularity of using technology to obtain loans has surged as an alternative for dentists who require quick loan approvals. Many providers of loans use automated processes and technology-based underwriting systems to provide loan approval significantly more quickly than traditional lenders. While this may make it easier to get dental practice acquisition loans through these alternative sources of funds, it does not guarantee that borrowers will receive reasonably priced loans. All borrowers should carefully review the rates, fees, and repayment terms associated with obtaining a dental office loan from an alternative lender.
How Lenders Evaluate Practice Acquisition Loan Applications
Before approving dental office loans for acquisitions, lenders will carefully evaluate numerous factors. Knowing what these factors are can help a dental office owner prepare a better application and avoid future issues that could arise as a result of submitting an inadequate application.
1. Personal Financial Profile
Finding out about personal financial history and credit score is the first thing that many lenders will look at when reviewing a dental office loan application. Having a solid credit score will show a lender that you are able to repay the loan based on your experience with credit. Moreover, a lender’s view of the debt-to-income ratio of a business owner could be very important to first-time practice owners who are trying to get dental office loans.
2. Practice Financial Performance
Because the income generated by the acquired practice will be used to pay off the loan, lenders will carefully review the financial performance of the practice. They will evaluate historical revenue, profitability, production reports, patient retention rates, payer mix, operating expenses, and cash flow to determine the financial stability of the practice. Practices that have a good reputation for providing professional dental services will likely also have a consistent patient retention rate and create a recurring revenue stream that can support this application.
3. Practice Valuation
Before approving financing, lenders will generally require an independent valuation or appraisal for the practice. The evaluation of the practice will consider the tangible assets associated with the practice, such as equipment, as well as the intangible assets of the practice, including goodwill, patient population, and its location and reputation. An accurate valuation of the practice will help to ensure the purchase price will be in alignment with the fair market value of the practice and assist in obtaining dental office loans.
4. Business Plan and Transition Strategy
When requesting financing, lenders typically expect borrowers to provide a business plan to demonstrate how they plan to operate and expand their acquired practice. Lenders also have an interest in understanding the transition strategy for the practice for the purpose of staff retention, communication to patients, and continuity of operations. By having a well-developed transition strategy, a potential borrowing client will reduce the amount of uncertainty regarding the transfer of ownership and thereby increase the potential success of acquiring dental office loans.
5. Debt Service Coverage and Risk Assessment
One of the most significant metrics when lending money is referred to as the debt service coverage ratio, or DSCR. This tells you if your practice will generate enough income to pay back the loan. Lenders assess overall business risk too and will evaluate things like local competition, economic conditions, management, and future income projections altogether. Loans typically have more favorable terms for lower-risk borrowers.
Final Words
Funding an existing dentistry practice can often be a substantial long-term investment, and finding appropriate loans will have a huge impact on your future success as a dentist. Providing adequate financial documentation, thoroughly reviewing your potential new practice, and knowing what type of documentation a lender expects will all increase your chances of getting approved.
