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How to finance a dental practice

Sept. 20, 2019
Dentists need to have a solid direction when it comes to financing their dental practice, whether it's for a new office or updating the existing one.

Opening a new dental practice or making improvements to an existing one is a thrilling venture. Creating a vision for how to serve patients is how you differentiate yourself from your peers.

Depending on important factors such as location or the size of your office, the cost of a new dental practice can range from $350,000-$500,000. That kind of investment covers the structural uplift a space needs, as well as equipment and inventory.

You may not be able to lay out all of that money on your own, especially at the beginning of your career. That’s why one of the first steps in opening a dental practice is to understand how to finance it. Here’s what to do when financing a dental practice.

Create a business plan

Starting your own dental practice makes you more than a dentist—it makes you a business owner. Therefore, you need a business plan. Your business plan should answer some key questions that will help you decide if you need financing. How big of a space do you need? Will you be taking on associate dentists or working solo? What is your growth strategy and plan for maintaining cash flow while you pay for your investment? If you’re new to all of this, the ADA Resource Center has dental business plan guidelines to guide you.

Review your financing options

Lenders generally see loans to dental practices as low-risk investments since the industry is essentially recession-proof. In fact, some lending institutions—mainly traditional banks such as BB&T, Bank of America, and Citizens Bank—have special divisions that work specifically with dentists through the ADA to go over the particulars of dental practice loans. No matter what your personal or professional financial situation, there is likely a financing option for you.

Traditional bank loans

If you already use a trusted banking institution to handle your finances, this might be the place to start your search for a quality loan. Although getting loan approval from a traditional bank is typically a tough route for most people, lenders like to work with dentists. Student debts typically are not seen as a barrier to acceptance, and the regular deposits that come with the business are a good sign to lenders, who seek consistency. Even better is that several major US banks have relationships with the ADA that result in reduced fees, complimentary planning tools, and additional support.

Most banks will try to set you up on a conventional term loan to keep monthly payments down. Typical term loans have the following terms: loan amounts—$30,000 to $5 million; repayment term—up to 10 years; interest rates—starting at 7%; wait time for approval—two to six weeks. Talk with a bank’s practice financing specialist to learn more.

Small Business Administration (SBA) loans

The SBA offers traditional term loans that are the gold standard of small business loans. The SBA doesn’t disperse funds itself, rather, it partners with intermediary lenders and guarantees up to 90% of the loan amount. As a result, the terms are generous and it’s easier for certain applicants to receive an SBA loan than a loan solely through a traditional lender.

The SBA’s popular 7(a) loan program is a good choice for dentists who want to start a practice since these funds are used broadly: for working capital, renovations, inventory purchases, and more. Typical 7(a) loans have the following terms: loan amounts—$5,000 to $5 million; repayment term—five to 25 years; interest rates—starting at 6.75%; wait time for approval—three weeks to several months. Keep in mind that the process of applying for an SBA loan is more arduous than for any other lender. The SBA requires submitting extensive documentation, and they can take months to approve your application.

Online lenders

If you are looking for a cash infusion that doesn’t involve a lengthy or difficult application process, an online alternative lender is the way to go. These lenders offer short- and medium-term loans that are generally more expensive than long-term loans. On the other hand, you may be approved and have your cash in hand as quickly as one business day. It’s doubtful that you’d want to get moving so quickly on starting a dental practice, but if you want to renovate your office or you need to replace equipment quickly, this could be a fine option.

These loans typically look like this: loan amounts—$2,500 to $250,000; repayment term—three to 18 months; interest rates—starting at 10%; time for approval—as quickly as one business day.

Business lines of credit (LOC)

A line of credit acts as a form of revolving credit. Once approved for a line, you can draw on it, repay, and draw again as needed. Lines of credit often have lower overall limits than those of loans, but they’re great for dealing with unforeseen developments when starting or renovating a practice. One of the most common issues dentists have is enlisting the work of a contractor or other third-party who runs costs over their estimates. A line of credit can be a lifeline in that case.

Standard terms for a business line of credit are: loan amounts—$10,000 to $1 million; repayment term—six months to five years; interest rates—7% to 25%; time for approval—as quickly as one business day. LOCs are great to keep in your back pocket in case of emergencies since there is no cost associated with them until you draw on the funds that are available to you.

Equipment financing

From chairs to x-ray machines to office computers, your equipment investments can run into the hundreds of thousands of dollars. That’s what makes equipment financing such an attractive option for dentists. Another reason: the major red flag that can derail a traditional loan for dentists is subpar personal credit or an otherwise demonstrated history of poor financial choices. Luckily, equipment financing is great because the equipment itself is used as the collateral of the loan. If you don’t make payments, the equipment might be seized, but you won’t have personal assets on the line.

Here are the standard numbers behind dental equipment financing: loan amounts—cost of equipment dependent; repayment term—six months to five years; interest rates—starting at 6%; time for approval—as fast as one business day. You can use equipment financing in conjunction with other forms of capital to complete the dental practice financing puzzle.

Compare your options

Now that you have a view of your major standard financing options (I’ve omitted choices such as asking friends and family for funding, though that’s also a possibility), it’s up to you to compare them and see what is best for you.

Remember, traditional term loans and loans administered by the SBA are your best bets for starting or acquiring a dental practice, though they have broad uses as well. If you’re making renovations, expanding, or making quick fixes to the office, a loan or line of credit from an online lender or equipment financier may be the way to go.

Jared Hecht is the cofounder and CEO of Fundera, an online marketplace for small business financial solutions including business loans. Prior to Fundera, Hecht co-founded the group messaging app, GroupMe.

About the Author

Jared Hecht

Jared Hecht is the cofounder and CEO of Fundera, an online marketplace for small business financial solutions including business loans. Prior to Fundera, Hecht co-founded the group messaging app, GroupMe.