Whether you are a first time practice owner or someone looking to expand, relocate or add an additional location, the options for financing today have never been more extensive.
When it comes to the types of financing available for the purchase of a dental practice, the most common options are conventional banks, small business loans and seller financing.
Conventional banks who specialize in financing dental practices may provide up to 100% financing. This means a lender may provide the buyer a loan for the full purchase price. Buyers will usually borrow additional money for operating capital or to acquire the seller’s accounts receivable. Some lenders offer this as a term loan or a line of credit or a combination of both.
Throughout the country, small business loans are made available through local lending partners who can offer traditional term loan options. Borrowers are typically required to cover a percentage of the borrowed amount. Depending on the lenders’ expertise the process can be very fluid. Trust your advisors when choosing a small business lender.
Seller financing is where the borrower has a financial obligation to the seller for the amount borrowed. This was quite common many years ago when bank financing wasn’t readily available like it is today for most borrowers. This option is more commonly used today for space sharing situations as a first lien position is difficult to obtain for traditional lenders.
Borrowers too often associate the best deal with the lowest interest rate. Interest rate is important, but it isn’t the only factor that a borrower and their advisors should be focused on. Remember, once the contract is signed, you are the one responsible for making the payments, not your advisor.
Terms offered vary from lenders but 10, 15 and 20 year terms are among the most popular selected by borrowers. With student loan debt being what it is these days, a longer term might provide better cash flow for the new owner. Before selecting the term, be sure to know what the principal reduction policy and the prepayment penalty policy is with the loan.
Principal reduction is where a lender provides the borrower the opportunity to reduce the outstanding principal balance by making a payment above and beyond the required monthly contract amount. Know what the lenders policy and limitations are prior to signing their documents. Some lenders have no limits, some limit the amount each year and some do not permit any principal reduction.
Prepayment penalties are quite common. A prepayment fee may be applicable if the loan is being prepaid in full during a restrictive period stated in the contract. The most common prepayment fee is 5% of the borrowed amount in year one and declines by 1% each year with no prepayment penalty after the fifth year. This varies by lender and should be discussed and disclosed prior to executing any loan documents. Prepayment penalties present less concern today for most borrowers and their advisors as today’s interest rates are quite low compared to previous years.
Collateral for most lenders is a first lien position on the business. A personal guarantee of the borrower is also required.
Some non-specialized lenders might limit the loan amount to a percentage of the requested amount. This would require the borrower to inject a percentage of the loan amount from their own personal savings. An additional household guarantor and the possibility of lien position on the personal residence may also be required. Fees could be a flat amount or a percentage of the approved amount. This varies by lender and their expertise in dental lending.
Create a realistic business plan. There are many resources available to provide templates and direction. Some lenders require them and may have their own templates.
No two practices and no two buyers are alike. A buyer’s experience, historical income, savings, credit score, student loan debt, installment debt, credit card debt, household obligations and household income all play critical parts in the underwriting process, decision and what collateral might be necessary to secure a loan.
The practice of your dreams could be right around the corner. Before that day arrives, connect with an expert and be prepared.
