At some point in your journey as a dental practice owner, you will likely need to apply for a loan. You may need additional funds to support expansion plans or to invest in new equipment to better serve your patients.
Unfortunately, there are many myths about practice lending, and they often scare dentists away from making necessary investments in their business. Below we have summarized some of the most common lending misconceptions, as well as accurate information to debunk them.
Myth 1: You can’t have outstanding student loans
If you’re staring at your student loan statements worrying about the future, breathe easy: your loans won’t prevent you from applying and qualifying for dental financing. Many lenders see dentists as a safe, sound and low-risk investment, since it is a profession that generates a quick return on investment.
Depending on their geographic location and real estate costs, new dental grads can qualify for anywhere from $550,000 to $750,000 for a startup loan, while more specialized practitioners (such as oral surgeons or orthodontists) can qualify for even more.
Myth 2: You need a significantly large down payment
Did you know you can qualify for a dental business loan without a hefty down payment? In fact, lenders can often offer 100% financing to new dentists or recent grads without a significant chunk of change in their pockets.
However, that doesn’t mean you don’t need to show cash on hand, period. Many lenders want to see that you are a sound financial steward with the ability to stay disciplined and save. Prepare to have between $25,000─$50,000 saved to qualify for a $500,000 loan, or $50,000─$100,000 to qualify for a $1 million loan.
Myth 3: You need a lower interest rate on your student loans
Not only is this assumption false, but it is also ill-advised. Avoid refinancing your student loans if you’re thinking about starting or buying a practice. If you refinance your student loan, you will be saddled with a higher monthly payment than you would have with income-based relief. This could impact your practice cash flow and thus restrict your loan qualifications.
Myth 4: You don’t need to start the loan conversation until you’re ready to buy
The earlier you start the loan prequalification conversation, the better off you will be. Even if you are still in dental school or working on completing your residency, you will learn helpful tips and best practices during prequalification conversation that will serve you well in the future:
- Acquisition preparation: Before you buy a dental practice, you need to show you are capable of producing the same quantity and caliber of work as the retiring dentist. For instance, if the retiring dentist specializes in high-end dentistry and you focus on crown and bridge work, the lender will see that as a gap. If you are already employed by a dental practice, request your monthly production reports from your employer so you can show potential lenders your performance numbers.
- Creditworthiness: Dental lenders will set their sights on borrowers who have a FICO score of 680 or better. Be sure to make minimum payments on time for all your existing debt.
- Debt management: Get strategic about your debt payment plan. For instance, it is generally better to have $40,000 in the bank than to pay down $40,000 in student loan debt. Focus on buying and funding your business first and paying down your student debt second.
- Purchase planning: In most cases, it is smart to put off major life purchases (such as buying a home or a new car) until you have funded your business and its startup costs.
Myth 5: You don’t need to shop around
Since dentists are low-risk investments for lenders, you have more leverage to negotiate working capital, interest rates and flexible payment schedules. Start prequalification conversations with several banks so you can compare their lending packages and even mortgage programs, business checking benefits and rewards programs.
Myth 6: You’ll need a lot of startup cash to cover loan payments
Fortunately, many lenders structure dental loans with no payment requirements until your practice is up and running. When that happens, you will most likely make graduated payments for the first few years you are in business until your patient count increases, and your schedule fills up. Then, you’ll transition into making standard payments for the remainder of your loan term.
Myth 7: Practice loans are the same, whether you are buying or expanding
Down the line, you may need more space, more high-tech equipment or more associates to serve your growing patient base. Dental lenders are well-positioned to support you and your practice through all of those milestones, but the loans and terms will look different.
For instance, if you plan to open another location, you’ll need to show that your first location can cover those new debt payments. Loan underwriters will review your historic cash flow to verify that your first location is performing well before approving a second office purchase.
A lender can also help you strategize the best approach to taking equipment loans. This may include paying off your debt over a three-year period or buying the equipment and reconsolidating your existing loan to stretch your cash flow.
No matter what you are using your loan for, you can expect experienced dental lenders to guide you through the process. If you are interested in connecting with a dental financing professional, speak to your Patterson territory representative about how Patterson Practice Transitions powered by Aprio can help you choose the right lender. Find out more by visiting pattersondental.com/practice-transitions.
About the Author:
Justin Schafer is the Director of Dental Practice Transitions at Aprio. Justin is a recognized dental industry leader with more than 12 years of experience guiding clients through practice transitions, mergers, real estate purchases, banking, debt restructuring and practice financing. His experience with financing dental transitions for two of the largest dental lenders in the nation have provided him with both buyer and seller perspectives on virtually every type of transaction imaginable. Justin helps dental practice owners understand the valuation of their practices for potential sales and the financial impact of selling on long-term personal wealth.