Whether you’re a new dentist establishing a dental practice, or an experienced dentist looking to relocate, expand, or upgrade, there are a number of considerations regarding how to pay for it. Unless a professional has access to personal or family funds, the answer is usually a small business loan. Here is some essential information about how the loan process works, what dentists should know about borrowing, and some warning signs.
What the loan process looks like
While you could spend a lot of time researching and mapping individual lenders processes, it’s better to understand what lenders will ask you:
• How much money do you need and what will it be spent on?
• What proportion of the money required would be provided by the requested loan? Where will the other finds come from?
• How is your practice going to work and how will the money flow in and out (a business plan and financial projections)?
• Will there will be sufficient cash flow after paying for operations to make principal and interest payments?
• Do you have the appropriate qualifications and experience (as a manager as well as a dentist)? Are you of good character with a history of being responsible financially?
Lenders will ask you to provide lists of required documents. While it is important to furnish them promptly, it’s more important that you appreciate what lenders are asking themselves as they review your deal.
How student loans, home loans, and other personal loans affect the borrowing process
Lenders ask themselves one simple question when making a loan—“Will I get paid back?” They are very focused on that question because the economics of the lending business means that one bad lending decision, where the lender doesn’t get the money back, can wipe out the profit on a dozen good loans, which could be a year’s production for a loan officer.
The first source of repayment lender consider is cash flow generated by the business. They ask, “Is it enough to make interest and principal payments on the loan?” Also, “Is there any leeway in case of problems?”
Lenders also generally look for a “secondary source of repayment.” Collateral is one such source, which are assets of the business that can be seized and sold to generate cash to repay the loan if it goes into default. Personal guarantees by the practice owner, backed by pledges of personal assets, are another safety net lenders often seek.
If student loans drive down a practice owner’s net worth (the difference between personal assets and liabilities) it makes the practice owner a less attractive borrower. Borrowers’ opinions on how much collateral is adequate vary; some only consider loans that are likely to have sufficient collateral after liquidation to repay the loan, others will accept lower levels of collateral if they are convinced the cash flow is sound.
Federal guarantee programs, such as the Small Business Administration’s (SBA) flagship 7(a) loan program, can help make up for a borrower’s lack of collateral as a secondary source of payment. Interest rates are limited to reasonable levels by the SBA, but these loans can involve a heavier bureaucratic burden, with more form filling and information disclosure, that some other loans. If you’re struggling to capture the interest of banks or other specialty lenders you should look to 7(a) lenders.
Common mistakes when seeking practice loans
At C7a we look carefully to see that a business has the reporting mechanisms and systems in place to highlight any financial or operating problems quickly, and ensure the owner understands it.
Practice management and real estate consultants can add a huge amount of value in planning and establishing a practice. They often have a “stable” of lenders and other service providers who are their go-to guys. At C7a, we’ve seen instances where banks, including specialty medical lending groups, haven’t provided the flexibility to potential borrowers that C7a can, largely because they have closely defined products or credit boxes. Compared with conventional loans, the SBA’s 7(a) program makes it easier for lenders to stretch the term of loans (reducing monthly debt service payments) and cope with collateral short falls.
When is the right time to apply for financing?
A lender is not the right one to ask, “I’m thinking of starting a practice and I’m just starting to explore possibilities…” There’s not a lot a lender can do with that. We are not in the business of giving business planning advice and are actually prevented from doing so by certain legal and ethical constraints.
If you’re starting or expanding a dental practice, reaching out to lenders when you have a business plan and sound final projections will be much more productive. Then they will have something upon which they can base a decision.
What factors remain beyond the practice scope that affect borrowing?
Leasing the right office space can be a make or break decision for dentists, and that can be a tough challenge in competitive real estate markets. If the timing of the financing review and approvals isn’t in sync with the real estate, leasing dentists can lose out on good leases because of delays in lender approvals or funding.
For any practice that’s dependent on securing a lease in a competitive market, we run the underwriting process and packaging process in parallel with the dentist’s search for a lease, using expected lease terms. Once a lease is actually agreed, we can amend the approvals relatively easily as we only have to deal with the differences from the expected terms, and the loan can close and fund in time to meet a landlord’s turnaround expectations for a lease.
SBA regulations require full and open disclosure of any fees paid by the lender in conjunction with the origination, closing, and funding of a loan. It’s good practice on non-SBA deals for any broker or advisor to disclose to clients all referral fees or commissions received from third parties, particularly lenders. Understanding what work was done to earn a fee can also be very instructive. Only when this is done can clients truly trust their advisors impartiality.