It's important to be prepared when seeking financing for your dental practice. Money is a complex business. Here is a step-by-step guide to help you get through the process of applying for a loan from an expert.
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If you’re thinking about borrowing funds for your practice, make sure you become educated on the potential options and the overall process from start to finish. Start by talking to a business banking representative who has experience working with dental practices in your area.
The goal of the conversation is to outline your plans and develop the best options for your situation. Also, meeting with a banking professional is the perfect opportunity to review other financial services solutions, such as deposits, cash management, and merchant services for your practice.
Know what will be required from the other side of the desk
Get you and your partners organized by compiling essential financial and business information. Think of this like you’re a contestant on Shark Tank and you need to make an effective and convincing presentation to the sharks. Have the theme music in your head and walk into the room ready to “wow” your banker.
Here are some common items that are essential to the review process:
• A business plan that highlights your practice, financial projections, demographic analysis, industry benchmarks, and marketing strategies. The website Score.org provides great guidance on business plans.
• A professional resumé that showcases your accomplishments and involvement in various industry-specific organizations
• Your personal and business tax returns for the last few years
• A list of account receivables aging to report timely collection of practice revenues
• A balance sheet and profit and loss statements, including key data that will help gain deep financial insights into the business operations
• A detailed personal financial statement: Have a personal statement that lists all your and assets and liabilities. Each individual bank has its specific form.
• Copies of leases and purchase and sale agreements
• Bank statements from the last few months
• Credit history: If you’re not aware of your personal credit history, take the time to review your credit report and score. Correct any errors before applying for the loan. Business loans rely heavily on personal credit scores as an indicator of willingness to pay in a timely manner.
Key terms to learn
In addition to getting yourself organized, it’s critical to know some of the key terms involved in the financing process. Here are common terms that are essential to the overall process:
• Debt service is the cash required to cover the repayment of interest and principal on a debt for a particular time.
• Covenant is a condition that the borrower must comply with in order to adhere to the terms of the loan agreement.
• Amortization refers to spreading payments over multiple periods.
• The Letter of Intent will spell out the terms and conditions of a proposed deal structure.
• The Commitment letter is a formal approval by the credit department with the necessary terms and conditions.
Financing programs: conventional and small business administration (SBA)
There are various types of lending programs available based on your lending needs and timeframe. Conventional financing programs may have more stringent loan requirements, such as large down payments and high debt service requirements, whereas the SBA operates a bit differently. Banks are able to extend credit using the US Government Guaranteed Lending Program through the SBA. Startup and growing businesses can benefit from the various SBA programs, such as Express, 7A, and 504. Visit sba.gov for more information.
Common types of loans
The next phase in the process includes evaluating the different type of loan offerings.
• Commercial mortgage—Purchasing or refinancing your office location are common situations. Owning real estate can be a great long-term investment. You can sell or collect rental income long after you retire.
• Investment commercial real estate—Perhaps you will locate your practice to this location, but you intend to rent out more than 50% of the space occupied by your dental office.
• Term loan—This loan is to make property improvements or modernize the office.
• Line of credit—This is working capital as you are waiting for private pay patients and insurance payments. Covering payroll and other expenses are typical uses.
• Equipment and software—Keep up with the latest technology that will make your office more efficient and productive.
• Practice acquisition and partner buy-ins—Business succession and opportunities to grow the practice are to be considered for the long term.
Key issues to consider with acquisition of real estate
• Flood insurance and flood zones—Ask the necessary questions if your potential real estate location is located in a high-risk flood zone, and be prepared to obtain the required insurance well in advance of financing.
• Environmental issues—These can range from asbestos, underground storage tanks, and radon, to name a few.
• Appraisal values—Local market conditions can vary, so work closely with your real estate attorney to negotiate the best price.
• Zoning—Get in touch with city officials to fully understand their specific requirements and approval process.
• Clear title—Your attorney will research to make sure the property is being delivered free of encumbrances.
• Property management—The services of a property management firm are something to consider with owning a new location because you may not have the time or expertise to oversee daily issues facing you or your possible tenants.
Keep in mind that there are many ways to structure a transaction. Work closely with your banker to customize a financing solution that is most appropriate for your budget and long-term financial goals. The process can seem daunting at first, but finding the right partner can help you accomplish your financing goals.