You walk into the building and it instantly feels like the perfect place to create your new practice. You want it. You deserve it. But will the bank lend you the money to buy it? Certainly, it seems that all the conditions are right. After all, interest rates remain at an all-time low. Commercial property is readily available and many sellers are eager to negotiate. Given the current market, who wouldn’t want to purchase or build their practice as soon as possible? In fact, dental lenders tell us that 60% of dentists in the first five years of practice seek to establish their own offices, up 10 percentage points from just a couple of years ago.
Jason Tyson is vice president of Bank of America Practice Solutions in Southern California. He and other lenders note that the timing may be perfect for some new dentists to pursue the dream of owning or building their own practice, but it’s a critical career decision that will affect the success of the doctor and the practice for many, many years.
In general, lenders encourage new dentists to devote the first couple of years in practice to working as associates before they take on the responsibility of purchasing or building their own offices. “We like to see the general practitioners wait a year or two and work as associates because they can get experience in an office and increase their hand speed, as well as build a track record in terms of production and managerial experience,” explains Mr. Tyson.
Allison Farey, president of Wells Fargo Practice Finance, concurs. The majority of new dentists typically work as associates before purchasing or building their own practices, but she notes that Wells Fargo also works with new dentists coming out of dental school who want to establish their own practices immediately. In these cases, the company looks at the candidates’ other dental practice experiences such as dental internships or working in family practices in the past.
“We look for those experiences that make these doctors much more prepared coming out of dental school than a typical new graduate might be. We will support a doctor just out of dental school with a smaller loan, in the area of around $300,000. (The process) is very specialized, and the applicants have to convince us that they have some special reason to start their own practice immediately.”
Student Debt? No Problem
While it is widely acknowledged that dentists graduate dental school saddled with exorbitant student debt, generally speaking, dental lenders don’t bat an eye. As Keith Merklin, senior loan officer, Live Oak Bank, explains: “Any lender that specializes in dental practice loans should understand that dentists will have debt.” The critical piece of the approval process is the cash flow analysis. “We look at all debt — student loan, car loan, home loan, etc. We will add up all the payments and determine if the dentist can afford to make the payments back to the lender.”
Moreover, it is common for dental lenders to finance 100% of the purchase price, as well as working capital. “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. Whereas with other industries, a borrower would have to come to the table with 10-20% down,” explains Mr. Merklin.
While dentists may be among the most financially responsible borrowers, there are no guarantees, and past financial indiscretions can quickly come back to haunt them. “Where new dentists get into trouble is if they have a poor track record of repaying debt and/or taking on too much debt,” explains Mr. Tyson. “Short sales or foreclosures will, in most instances, prohibit financing. When we see multiple late payments, we look at that as a possible indicator of how you pay your bills. High credit card debt is another red flag. If you have excessive credit card debt and you are a new dentist, in most cases, that’s going to be a problem. It’s typical for a new dentist to have $200,000 to $400,000 in student debt. They may have a new mortgage, a couple of credit cards, and a new luxury car payment. That’s a typical credit report. We don’t make our decision to approve or deny a loan just on a credit report. We also need to review the doctors’ production, their assets vs. liabilities, and also the build out or acquisition.”
As Ms. Farey notes, in addition to a poor financial history, if a dentist wants to purchase a practice that shows negative trends, meaning production is now lower than in the past, that may be a red flag to lenders. A desire to relocate can also signal the alarm for lenders. Ms. Farey explains that if a dentist is moving across the country to a location where s/he has no family or other connection to the area, that may not be well received by the lender. “We find that when that happens, dentists don’t have a commitment to the community. They don’t know people in the area, and there is nothing other than the dental practice that is keeping them there.”
A new dentist who wants to purchase a high-end practice also may find it challenging to get a loan. Mr. Merklin explains that lack of experience can be a red flag. “If a dentist with minimal production experience wants to purchase a $700,000 practice, how are they going to handle that level of production? I want to see that the borrower has experience as an associate. I want to look at what their production is with that practice, how many days a week they are working, and if they have management experience.”
Disciplinary actions or probationary periods also are cited by lenders as potential hurdles to securing practice financing.
Most dental practice lenders offer 10- or 15-year fixed-payment plans. And some, including Bank of America, offer a 20-year option. In addition to fixed loan payments, some lenders offer a tiered plan, meaning that the payments would increase over time as the practice grows. For example, if the dentist borrows $450,000, with an amortization period of 10 years s/he would pay $0 for the first four months, $1,610.45 for the next eight months, $3,220.91 for the following 12 months, $4,831.36 for another year, and $6,441.82 a month for the remaining seven years.
John Tonjes is executive vice president of Midwest Business Capital; he encourages new dentists to consider an SBA (U.S. Small Business Administration) loan with a preferred SBA lender. “An SBA loan is a loan provided by the bank that has a government guarantee. Most SBA loans have a 75% guarantee, which makes the bank more compelled to be more aggressive in their underwriting or take more risks when it comes to approving loan requests.” The advantage of working with a preferred SBA lender is that the approval process is similar to that of conventional lenders.
Mr. Tyson explains that the majority of dental practice loans Bank of America offers are conventional term loans designed to keep the payments low. “We are trying to keep these doctors in the best cash-flow situation possible, keep their monthly payments down, so that they can invest in marketing, payroll, technology, whatever they need to invest in to grow the practice. If they are able to make a higher payment, the extra amount goes directly toward the principal.”
Additionally, each of the lenders we spoke with indicated that loans typically include the purchase or build out of the practice as well as working capital — monies necessary to keep the lights on and the staff paid while the practice grows. “A typical practice loan from Bank of America includes $75,000 in working capital and an additional $25,000 for dentists who want to increase their business education by working with a practice management company. So the dentist would be eligible for at least $100,000 in working capital. The balance of the loan will be anywhere from $300,000 to $400,000. Those funds will go for tenant improvements or construction and to equipment. For a startup, the amount will be between $400,000 and $450,000,” explains Mr. Tyson.
Aside from securing financing for a new practice, lenders urge new dentists to take a few other factors into consideration. “Location is key,” says Mr. Tyson. “They really need to think about where they want to live and raise a family. In addition, they need to think about the type of practice that they want to have. They also need to think about creating a business plan. From there, they need to determine if they want to buy an existing practice or, if it is a growing market, if they want to do a startup.”
Ms. Farey explains that in addition to determining where the dentist would like to practice, it is essential that dentists develop their vision for the practice. Her company walks new dentists through a series of questions to help them identify their career goals, personal skills assessments, and other steps to determine if practice ownership is right for them.
When applying for a practice acquisition or startup loan, dentists should be prepared to provide specific information. The lenders we spoke with will request some or all of the following: tax returns for multiple years; copy of the dental license to practice; resume or curriculum vitae; production reports; application package from the bank; personal financial statement, which will include all financial assets and liabilities; business plan; an explanation of how the practice will be staffed; demographic information about the location of the practice; financial information about the practice to be purchased; marketing plans; and projections. Additionally, the borrower’s credit score will be checked. Firms we spoke with noted that they like to see practice finance applicant scores in the high 600s or above.
Once the lender has all the information, dentists can typically secure preapproval in about three to seven days.