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Don’t overlook community banks as a dental practice financing source

Feb. 19, 2020
Dentists have particular needs when it comes to financing. They may believe they should use a large lending institution, but this is not the case, says Chad Pfeif of Legacy Bank. A local financial institution may be a dentist's best bet.

Like many small and medium-sized businesses, dental practices often face needs that cannot be financed with immediate cash flow. A practice may want to purchase new treatment or diagnostic equipment, add another service, enhance administrative technology, support a new marketing program, or purchase another practice. Some may just need to establish a line of credit to support cash flow. Perhaps a dentist wants to start a new practice, which requires significant funds.

Fortunately, dentists facing any of these situations can rely on their attorneys or accountants and a host of professional organizations for insight and guidance. The advice often includes obtaining outside financing. When dentists research lending sources, they will have many national and regional banks actively solicit them to provide financing. Some banks have reached sponsorship agreements with national and regional dental associations.

More than quick loans

But many practices need more than just immediate access to funds. They need a long-term relationship with a lender that understands both the unique business aspects of dental practices and the economic and demographic characteristics of the market they serve. These lenders will work with dentists and their advisors to provide adequate funding, while taking steps to help them avoid overextending themselves and risking any financial problems.

For many practices, these attributes can often be found with a community bank. According to the FDIC, there are likely one or more community banks in a practice’s market, as they comprise approximately 92% of all banks in the country.

When choosing to approach community banks, dentists are advised to perform due diligence in order to identify those with a history of providing financing for dental and medical practices. Information about a bank’s clients can often be determined by reviewing its website or social media pages.

These banks understand how a dental office’s revenue stream and cash flow is influenced by its balance between fee-for-service versus insurance claims. They appreciate consistent fee collection policies, successful marketing initiatives, accurate record keeping, stable average fee revenue, and steps to control costs such as supplies, rent, salaries and benefits, equipment service, and insurance. They know these elements factor into a practice’s ability to take advantage of financing. Experienced lenders know that some practices have staff handle these assignments, while others might retain an outside firm. This does not mean banks have a preference as to how these tasks are undertaken but they will most certainly review the process.

What happens during the loan process?

The loan process will often begin with the bank gaining an overall perspective of the practice’s organizational and ownership structure. A solo practice seeking a line of credit but with no real estate or costly equipment needs may have already created a Limited Liability Company (LLC). A large practice or one planning to expand may have created separate business entities—one to serve patients and another to own real estate and special equipment. Bank loans may then be structured to fund the separate entities. 

If a practice seeks financing for new equipment, a bank familiar with the market can help the practice evaluate this investment by comparing the cost of the technology to the economic ability and willingness of the local patient population or their insurers to cover the equipment fees. Part of this conversation may relate to the expected level of patient referrals from other dentists.

Banks are well versed in the concepts of utilization rates for equipment. They can help a practice draw comparison rates for the technology it wishes to purchase versus the equipment it already owns, and the projected utilization levels of the new technology must justify the cost.

Community banks can be a great help to dentists who want to borrow funds to open a first or second office. They know the local cost ranges for rent, remodeling, or new construction, as well as the overhead for dental equipment, staff, and other expenses. They also appreciate the lag time that may be necessary for a new office to build a patient base. This knowledge will enable the bank to structure loans that can help prevent dentists from overextending themselves.

Other advantages of community banks

Many dentists are interested in either purchasing a practice or buying into an existing one. They may have great dental skills and a strong reputation but may not know how to approach the financial aspects of their plan. Community banks can evaluate the size of an investment against the financial strength, operating costs, and revenue potential of the practice and the additional referral or specialty practice revenue the dentist might bring into the practice.

Ultimately, banks will create a loan agreement that identifies the individuals responsible for making sure a practice meets the loan repayment schedule, as well as those who are personally responsible for the payments should the practice be unable to do so. For small practices, this is normally the dentist-owners. In large practices, or ones in which borrowed funds are divided into individual business entity loans, several dentists may be responsible. Regardless of the size of the obligation, the bank will require each individual who signs the agreement to provide a personal financial statement and two or three years of personal income tax records.

Using bank loans is a logical option for many dental practices, and one that local lending sources are available for. It makes sense to determine whether there is a local bank that understands dentists’ patient services and business models. 

 In his role as branch president and chairman of the Loan Quality Committee for Legacy Bank, Chad Pfeif has extensive experience originating and administering loans for small and mid-sized businesses, with specific experience in arranging financing for dental and medical practices. Legacy Bank serves southeastern Colorado, with branches in eight communities ranging in population from 400 to 400,000 people. Contact him at [email protected].