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Demystifying the Practice Loan Process

Demystifying the Practice Loan Process banner image

You’re thinking about owning your own practice, and if you want to acquire an existing one, you will likely need to borrow money. For many, the process of securing a loan can seem daunting. But if you’re well prepared, it doesn’t have to be.

Also unnerving to most dental associates is the amount of student loan debt they’re likely carrying. Class of 2018 dental school students graduated with an average educational debt of $285,184, according to the American Dental Education Association, which is why associates who might be ready to step out on their own are often concerned about taking out a loan to start a dental practice. It’s also a concern for older dentists, since younger dentists are the buyers of their practices.

Carrying student debt does not preclude a dental associate from obtaining a loan. And like student loans, borrowing money to acquire a practice can be viewed as an investment in your future.

Tip: The earlier you include a bank in the process, the easier it will be for a lender to help secure what you need.

Initial questions

As part of the loan application process, you’ll have a discussion with your bank to help them understand the practice you’re buying and gather key information. They’ll want to know about its history, how many patients it serves, what kind of staffing model it has, financial information, whether the seller plans to stay on for a period of time to help with the transition—and those are just a few examples.

With that, there’s a lot of self-evaluation involved, such as:

  • Determining how much of your savings you want to invest in the practice.
  • Evaluating your credit history, including your credit score and what type of debt (outside of student debt) you’re currently holding.
  • Assessing other personal needs, such as whether you plan to purchase a home in the near term.

These and other key questions will help the lender understand your financial picture.

Determining a loan that’s right for you

When you’re looking to acquire a practice, banks typically offer a fixed-rate term loan. How long you want to keep the debt is a key factor in structuring the loan. That is, are you comfortable maintaining a certain level of debt and putting your excess cash aside to build a reserve? Or do you want to pay the debt down as quickly as possible with your cash flow?

You may also have debt considerations beyond the term loan. It’s common for a practice owner to secure a modest line of credit for day-to-day operating needs. You can draw from a line of credit (up to a predetermined maximum amount) when needed and pay it down periodically, paying interest on the amount you borrow.

If you’re looking to upgrade or expand a practice that you’re acquiring, you may need to secure a separate loan to update or purchase additional equipment or furnishings.

Also, if you’re purchasing real estate as part of the transaction, you’ll need to consider the loan structure on that as well. Real estate loans amortize over a longer period of time—typically 20 years. You may also be required to provide a certain amount of equity on a real estate purchase. If you don’t have the cash to cover the equity, then you’ll need to work with your bank to help structure a loan that meets your needs.

Other items to consider

While purchasing a practice is typically more costly than starting a new one, it comes with the benefit of established patients and cash flow. That’s because, in our experience, associates usually retain a high percentage of patients from the existing practice, especially in cases where the selling dentist stays on to help with the transition. And the more comfortable the bank is of a smooth transition of cash flow, the more likely the bank will lend against the full value of the practice.

As previously mentioned, the earlier you include a bank in the process, the easier it will be for the lender to help secure everything you need. That includes bringing in other resources to help complete an acquisition—resources you might not have been aware you need. A dental practice valuation expert, for example, understands the different aspects of a practice and can make recommendations on how to improve efficiency.

There are also fundamental advisory roles that will help you through the process, including an accountant, an insurance adviser and an attorney, especially one who is familiar with the industry.

Embarking on the loan process can seem intimidating. One way to prepare yourself is to realize that the questions you should ask yourself about why you want to buy a practice are the same questions the bank will ask:

  • Is the practice you’re looking to acquire a good fit?
  • Do you have a solid credit history? Is your current financial condition favorable for acquiring a practice?
  • What is the patient base and the staff profile of the practice you’re looking to acquire?
  • What’s your timeline for making an acquisition?
  • What kind of debt are you going to need (acquisition, line of credit, real estate) to complete a transaction?

We should also note that some associates look outside their current practice to find a seller, while others may want build a practice from scratch. Each of these scenarios come with their own set of loan considerations as well.

Securing a loan can be a smooth process. If you prepare yourself by including your bank in the process as early as possible, answering key questions about the practice, your finances and your goals, and understanding what the loan process might entail, you can make the process a positive experience.

This information is provided courtesy of BMO Harris Bank, the only practice financing company endorsed by ADA Member Advantage. Learn more about BMO Harris Bank online, or by calling 855.932.4232