It's important to be prepared before taking out a loan for your dental practice. When you meet with lenders, do your homework and have some questions ready so you can find the best lender for you and your practice.
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This article originally appeared in the Principles of Practice Management e-newsletter. Subscribe to this informative twice monthly practice management ENL here.
While operating in the ever-growing health care industry, it’s important to stay competitive. Whether you’re planning to acquire a new practice or improve your current one, a working capital loan can secure the funding you’ll need to reach your goals.
The New York Federal Reserve reports that 45% of U.S. small business owners applied for financing in 2016. If you’re projecting a need for additional funding for business purposes, there are a few questions worth asking before you sign off on any loan application.
1. What’s my purpose and time frame?
Identifying the purpose for your loan can help you better pinpoint the right amount of funds to borrow. Do you need to cover a one-time payment for new equipment, or do you need to cover something ongoing, such as extra funding for payroll?
Determine how the immediacy of your need. If you need to replace a broken digital intraoral sensor, you’ll likely need the funds as soon as possible. Just keep in mind that there can be a disconnect between fulfilling a need and reality—can you afford to wait longer than two months, or do you definitively need the money next week? Ask the lender the turnaround time from application through approval to delivery of funds. This can help you narrow down your options for a financial partner.
2. Is collateral required?
Depending on your credit history and the type of loan you’re applying for, you may be asked to provide some security for it. Common personal items borrowers list as collateral are their homes, cars, equity, and assets.
Unfortunately, people often don’t realize the risks of using personal collateral for business. Be sure to evaluate the risk to the reward. For most, their home is their largest personal asset. By collateralizing your home for any of your debts, you may put it at risk due to factors you cannot control, such as a turbulent economy, changes in the marketplace, and changing legislation, for example.
If collateral is required, consider seeking alternatives to personal collateral, such as dental equipment or business assets. It’s best practice to keep your business and personal finances completely separate.
3. How will it impact my credit score?
In my two decades of working in finance, I have yet to find a lender who doesn’t check a credit score. That being said, the type of credit inquiry performed and the number of bureaus checked varies from lender to lender.
It’s difficult to say exactly how every individual’s score will be affected since credit-reporting bureaus hold their algorithms close to their chests and there may be various credit events happening at once. For example, if a borrower uses a broker to look for a loan, he or she may review the credit before submitting to lenders to review the loan for credit decision. Each lender reviewing the file will likely perform their own credit check as well.
Credit inquiries, or checks to your credit report, can be made as either soft or hard inquiries. A soft inquiry is designed to be used for a background check and does not affect your credit score, whereas a hard inquiry, which happens when you actually apply for something, will dock your score a few points.
When it comes to actually applying for loans, do so sparingly, as multiple hard inquires will cause a drop in your credit score. Ask your lender if it will affect your score. Some, including Bankers Healthcare Group, often simply make a soft inquiry, which does not hurt your score.
4. What kind of payments can I make?
While negotiating your loan details, work to find the right payment model for your needs. Different loans have their own interest and payment models, so be sure to communicate and strive for terms that best fit your practice’s unique situation.
When dealing with interest, be aware that simple and compound interest models differ drastically. The easiest way to describe it is that simple interest is a fixed rate, payment, and term, which is calculated by multiplying the loan amount times the interest rate times the term. Compounding interest is interest that compounds on the outstanding balance and any interest accrued, and it may vary month to month.
5. What will my loan look like down the road?
You’ve probably seen loan offers with promotional or introductory rates, but what will your loan look like a few years down the road? Some lenders will offer introductory, teaser, or temporary rates solely to draw in potential borrowers, only to raise the rate as the loan matures. Avoid surprises, be sure to ask questions, and get all the clarification you need.
If you don’t want to commit to a fluctuating rate, search for lenders that offer flat, more predictable rates. Be sure to ask how long specific rates will last, what the potential repercussions are if any missed payments are missed, and what the terms are after the introductory period.
These are just some of the many questions to ask when seeking financing for your practice. Remember, whichever lender or loan you do choose, take a step back and ask yourself and your lender the right questions before signing any application.
