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The Truth about Dental Practice Loans

dentist at computer

If you’re thinking about opening a dental practice or acquiring an existing one, you will likely need to borrow money. It’s a fact: applying for and securing a loan can be a bit confusing at best, stressful at worst. We’ve broken down the myths, and sourced some helpful tips, to help you simplify the process.

True or False: You can’t get a business loan if you have student loan debt.

False. Student loan debt doesn’t prevent you from getting a business loan. Borrowing money to own a dental practice can be viewed as an investment in your future.

Most dental associates will have a fair amount of student loan debt. Dental students in the class of 2018 graduated with an average of $285,184 in student debt, according to the American Dental Education Association. Associates ready to step out on their own are often concerned about taking out another loan, but it’s also a concern for established dentists as associates could buy the dental practice they’ve worked years to build.

Get ready for (lots of) questions

As part of the loan application process, talk with your bank to help them understand the dental practice you’re hoping to buy.

They’ll want to ask about:

  • The dental practice’s history
  • How many patients it currently serves
  • What kind of staffing model it has
  • Its financial information
  • Whether the seller plans to stay on for a period of time to help with the transition

True or False: You should talk with a lender before you apply for a loan.

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

Some associates look outside of their current dental practice to find a seller, while others may want to start a dental practice from the ground up. Keep in mind these scenarios will have their own sets of loan requirements, and your lender will be a valuable source of information.

What loan is right for you?

When you’re looking to buy a dental 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. In other words, 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?

Download a PDF chart that details the paperwork that may be required for different types of business loans.

You may also have debt considerations beyond the term loan. It’s common for a dental practice owner to get 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, expand or acquire an existing dental practice, you may need to secure a separate loan to update or buy more equipment or furniture.

Spend some time on a self-evaluation of your financial goals prior to speaking with a lender.

Consider things like:

  • Knowing how much you can/want to invest in the dental practice.
  • Reviewing your credit history and current debt(s) besides student loans.
  • Assessing your personal financial goals, such as buying a home. 

True or False: If you apply for a dental practice loan, the property is included.

False. Real estate is a different loan structure, as the loans amortize on an average of 20 years.

If you’re buying real estate as part of the transaction, consider the loan structure on that as well. Real estate loans are paid down 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, work with your lender to structure a loan that meets your needs.

Lenders will help you through the process

Buying a dental practice is typically more expensive than starting a new one, but it comes with the benefit of established patients and cash flow. Associates usually retain a high percentage of patients from an existing dental practice, especially if the selling dentist helps with the transition. The more confident the bank is of a smooth cash flow transition, the more likely it will lend against the full value of the dental practice.

Bring in other resources to help complete an acquisition. For example, a valuation expert understands all aspects of a dental practice and can make recommendations on how to improve efficiency. Fundamental advisory roles - an accountant, an insurance advisor and an attorney who specializes in the dental industry - can help make the loan process less stressful.

The bank will usually ask you certain questions about buying a dental practice and they’re likely the same questions you’ve asked yourself:

  • Why is this dental practice a good fit for you?
  • Do you have a solid credit history? Is your current financial condition in good shape for acquisition?
  • What is the patient base and the staff profile of the existing dental practice?
  • What’s your acquisition timeline?
  • What kind of debt do you need (acquisition, line of credit, real estate) to complete this transaction?

Remember these three steps for securing a business loan:

  1. Include your bank in the process as early as possible.
  2. Be prepared to answer questions about the dental practice, your finances and goals.
  3. Work to understand the entire loan process.

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, or call 855.932.4232.

Resources

Loan Options for Practice Growth [PDF] details the paperwork that may be required for different types of business loans.

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